Don't write off the euro - well, not just yet anyway

In economics nothing is for ever and the euro will eventually go the way of the gold standard

SO NOW it is the "euro flop" story. Yesterday the euro fell to another new low at $1.05, continuing its steady decline since its inception at the beginning of the year. The fall is all the more notable since it contrasts dramatically with the official bombast at its birth. At that time, amidst the triumphalism, there were genuine concerns that an over- strong euro might undermine European competitiveness. The possibility of a near-collapse was not in the brochure.

We have reached the stage where Wim Duisenberg, president of the European Central Bank, is today reported in a German business weekly as saying that there is no danger of the euro becoming a weak currency. When central bankers say there is no danger of something happening, you know this is precisely the outcome worrying people in the financial markets. It certainly will do little to check the string of stories about the sickly nature of the euro.

At this stage I can make a prediction with total confidence. The euro- zone will not last. What I cannot predict is when it will end - whether it will break up within the next couple of years before national currencies are finally abolished, or whether it will be abandoned (maybe even as part of a movement to a single world currency) in a generation or so, say some time about 2030. An early collapse is in fact rather unlikely, given the political commitment to the euro. But in economics nothing is for ever, and the euro will eventually go the way of the gold standard and the Bretton Woods fixed exchange rate system, and be replaced by something else.

However, to focus on the sickly euro is to focus on the wrong side of the story. The problem is not the euro itself, but the European economy. The weakness of the euro is more a reflection of European economic under- performance than a cause of it, though having a single currency and a single interest rate for a very diverse economic area does to some extent make the problem harder to fix.

The euro is weak because the European economy is weak. Not all of it, but at least half. The half is Germany and Italy. Both countries have many wonderful companies - global giants in Germany, medium-sized powerhouses in Italy - but in both cases demand has only been inching forward for several years. Both countries need lower interest rates to push their economies forward.

France, the other economy that really matters, has done rather better and will manage reasonable growth this year. It can manage with the present interest rate structure - but in an ideal world, it too could do with another interest rate cut. The ECB did cut interest rates by half a per cent last month (one of the main reasons for the euro's continued weakness). But it has been assumed by the markets that this would be the last cut in the cycle. Whether that will prove right is not at all clear.

The president of the ECB been vague about interest rate expectations, doubtless intentionally. The problem is that while Germany and Italy could do with lower rates and France could live with them, other countries such as Spain and Ireland really need higher rates to stop their booms whizzing out of control. The "one-size-fits-all" interest rate self-evidently doesn't fit all.

But if the euro is part of the problem, rather than part of the solution, it is by no means the whole problem. Indeed it is tending to catch the blame for troubles that have nothing to do with it and long pre-date its inception. It is both unfair and incorrect to declare the euro a failure on the basis of five months' experience. The lags in economics are far longer than that.

So what should we look for in the months ahead, as clues to whether the euro is a serious hindrance to European economy recovery, or a relatively minor complicating factor? Here are three tests.

Test one will be whether European consumers decide to dip into their bank accounts and spend rather more in the next couple of years. What Europe desperately needs is a consumption-led recovery. It needs people to behave less responsibly, splash a bit of money about, have some more fun. Europe cannot rely on America to pull along the whole world economy year after year, and America cannot do so anyway. Look around the world and there is no other candidate to be a locomotive.

Test two will be whether European governments start to tackle the string of detailed regulatory and taxation blockages which currently inhibit growth. They are lumped together in expressions such as "structural polices" and they differ from country to country. But the common theme is that most euro-bloc countries require public sector reforms which will bring them into line with US and UK practice.

The awful truth is that the big three European economies, Germany, France and Italy, have created no new net jobs in the last 20 years, whereas here we have increased employment by 8 per cent and in the US employment is up 32 per cent. Could the single currency become a spur to structural reform?

Test three is whether European companies will embrace the opportunities that the euro, in theory, presents. In theory the larger currency zone should force greater efficiency on companies. The advantage is not so much that they will have the opportunity of selling to a larger market, for they have that already. The advantage is that both they and their customers will be able to compare prices directly. So they will be under the whip to extract more efficiency out of their plants and their offices.

If the European economy as a whole does become more efficient that will be a powerful argument for the single currency. Or put the other way, if the single currency does not force more efficiency, there is not much point in having it.

So distrust the inevitable headlines about the supposed failure of the euro. Distrust the equally inevitable headlines about the incompetence/ inflexibility/ inexperience of the European Central Bank. The mood of euphoria may have changed, but that was always going to happen. The fundamentals of the euro have not.

Of course, moods do matter. I learnt something new the other day. I was talking with an American banker. He told me the view of their bank now was that Britain would not join the euro after all. It had concluded as the months passed that there simply was not much advantage and there were a lot of potential disadvantages. But that decision, like any judgement on the ultimate success or otherwise of the euro, seems to be a long way off.

PROMOTED VIDEO
Arts and Entertainment
Novelist Martin Amis at The Times Cheltenham Literature Festival

books
Arts and Entertainment
Alfred Molina, left, and John Lithgow in a scene from 'Love Is Strange'

After giving gay film R-rating despite no sex or violence

film
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
Robin Williams will be given a 'meaningful remembrance' at the Emmy Awards

film
Arts and Entertainment

tv
Arts and Entertainment
Arctic Monkeys headline this year's Reading and Leeds festivals, but there's a whole host of other bands to check out too
music
Arts and Entertainment
Blue singer Simon Webbe will be confirmed for Strictly Come Dancing

tv
Arts and Entertainment
'The Great British Bake Off' showcases food at its most sumptuous
tv
Arts and Entertainment
Cliff Richard performs at the Ziggo Dome in Amsterdam on 17 May 2014

music
Arts and Entertainment

TV
Arts and Entertainment
Educating the East End returns to Channel 4 this autumn

TV
Arts and Entertainment
Benedict Cumberbatch will voice Shere Khan in Andy Serkis' movie take on The Jungle Book

film
Arts and Entertainment
DJ Calvin Harris performs at the iHeartRadio Music Festival

music
Arts and Entertainment
The eyes have it: Kate Bush

music
Arts and Entertainment
From left to right: Mark Crown, DJ Locksmith and Amir Amor of Rudimental performing on stage during day one of the Wireless Festival at Perry Park, Birmingham

music
Arts and Entertainment

books
Arts and Entertainment
Tim Vine has won the funniest joke award at the Edinburgh Festival 2014

Edinburgh
Arts and Entertainment
Peter Capaldi and Chris Addison star in political comedy The Thick of IT

TV
Arts and Entertainment
Judy Murray said she

TV
Arts and Entertainment
Tim Vine has won the funniest joke award at the Edinburgh Festival 2014

edinburgh
Arts and Entertainment
Jeremy Paxman has admitted he is a 'one-nation Tory' and complained that Newsnight is made by idealistic '13-year-olds' who foolishly think they can 'change the world'.

Edinburgh
Arts and Entertainment
Seoul singer G-Dragon could lead the invasion as South Korea has its sights set on Western markets
music
Arts and Entertainment
tv
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Have you tried new the Independent Digital Edition apps?

ES Rentals

    Independent Dating
    and  

    By clicking 'Search' you
    are agreeing to our
    Terms of Use.

    All this talk of an ‘apocalyptic’ threat is simply childish

    Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

    Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
    Mafia Dons: is the Camorra in control of the Granite City?

    Mafia Dons: is the Camorra in control of the Granite City?

    So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Once the poor relation, the awards show now has the top stars and boasts the best drama
    What happens to African migrants once they land in Italy during the summer?

    What happens to migrants once they land in Italy?

    Memphis Barker follows their trail through southern Europe
    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
    Frank Mugisha: Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked

    Frank Mugisha: 'Coming out was a gradual process '

    Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked
    Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

    Radio 1’s new top ten

    The ‘vloggers’ signed up to find twentysomething audience
    David Abraham: Big ideas for the small screen

    David Abraham: Big ideas for the small screen

    A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
    Florence Knight's perfect picnic: Make the most of summer's last Bank Holiday weekend

    Florence Knight's perfect picnic

    Polpetto's head chef shares her favourite recipes from Iced Earl Grey tea to baked peaches, mascarpone & brown sugar meringues...
    Horst P Horst: The fashion photography genius who inspired Madonna comes to the V&A

    Horst P Horst comes to the V&A

    The London's museum has delved into its archives to stage a far-reaching retrospective celebrating the photographer's six decades of creativity
    Mark Hix recipes: Try our chef's summery soups for a real seasonal refresher

    Mark Hix's summery soups

    Soup isn’t just about comforting broths and steaming hot bowls...
    Tim Sherwood column: 'It started as a three-horse race but turned into the Grand National'

    Tim Sherwood column

    I would have taken the Crystal Palace job if I’d been offered it soon after my interview... but the whole process dragged on so I had to pull out
    Eden Hazard: Young, gifted... not yet perfect

    Eden Hazard: Young, gifted... not yet perfect

    Eden Hazard admits he is still below the level of Ronaldo and Messi but, after a breakthrough season, is ready to thrill Chelsea’s fans
    Tim Howard: I’m an old dog. I don’t get too excited

    Tim Howard: I’m an old dog. I don’t get too excited

    The Everton and US goalkeeper was such a star at the World Cup that the President phoned to congratulate him... not that he knows what the fuss is all about
    Match of the Day at 50: Show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition

    Tom Peck on Match of the Day at 50

    The show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition