Here comes the euro, adding to the world's economic instability

In an ideal world, Europe would have got the euro up and running, or postponed it until the next upturn

THE QUEEN'S head was the least important part of it. The kerfuffle over the design of the euro notes and the lack of national identification thereon, masks the fact that a new source of uncertainty is about to be sprung on an increasingly uncertain world.

Markets hate uncertainty, and they have had it delivered in loads: uncertainty about the East Asian economies, about the Japanese banks, about Brazil's debts, about Russian solvency, about an incipient British recession and, of course, about the American presidency too. The one island of calm seemed to be continental Europe, which was pretty smug. The French and German economies were growing, seemingly undamaged by the Asian downturn, and plans for the euro were going along just fine.

The main worry, it seemed, was how a one-size-fits-all interest rate policy would work in practice. There is an immediate need to reconcile Irish and German interest rates, with Ireland ideally needing higher rates to curb a runaway boom, and Germany maybe needing lower ones to combat disinflation. But this was seen as a technical difficulty. The euro itself, now only three months from launch, was being heralded as providing Europe with an anchor, a point of stability in an uncertain world.

Not any more. Earlier this week, the IMF raised the disagreeable issue of who might be lender of last resort to a euro country's banking system if there was a liquidity crisis. And then people started to ponder the equally disagreeable possibility that, were the Americans to try to engineer a co-ordinated interest rate cut, the new European Central Bank might not fall into line because the needs of the world economy were not part of its remit. Its job is confined to meeting Europe's needs.

Certainly, my colleague who saw Willem Duisenberg, chairman of the ECB, speak earlier this week, felt that his performance was a masterpiece of complacency and arrogance. Certainly looking at his evidence to the European Parliament, there is no recognition that (a) the world might be facing a crisis of deflation, and that falling prices would need different policies to rising prices, (b) there was danger of a "credit crunch", where perfectly credit-worthy borrowers were denied funds because of a more generalised banking malaise, and (c) more than one-third of the world economy was already in recession. Instead, there was a long list of the achievements of himself and his board, and assurances that the preparatory work for EMU was on schedule.

As for the key issue of monetary strategy, that was being postponed. The language that Dr Duisenberg used to report to the European parliamentarians is a bit depressing. Try this sample: "The need to set priorities was also a major factor, opting to schedule our decision on euro area's monetary strategy for the autumn of this year. The determination of a strategy... is a very important decision to be taken...

"Moreover, another reason for not having taken definite decisions regarding the monetary policy strategy, is that the matter requires very thorough consideration."

And so on. Now, to be fair, this focus is understandable. The ECB has first to get the operational details of its new currency right, and sorting out monetary policy arguably can be put off a bit. The fact that its president speaks in pompous Euro-speak rather than the direct language of Britons or (most) Americans can be attributed to cultural and language differences.

But it does rather underline the point that the ECB is going to be little help if there is some general world banking crisis in the coming months. It will be so absorbed with the business of issuing the euro that it will have no space left to think about the problems of the rest of the world.

But, of course, if the world economy heads downwards more seriously than it is already doing, Europe cannot escape unscathed. European businesses know this very well, for more than half their exports are outside the euro area. In the case of Germany, the largest exporter from Europe, no less than 57 per cent of its exports will be to countries outside the single currency. So the idea that continental Europe will continue to enjoy a cyclical recovery, undisturbed by the swirling angst of the rest of the world, and that all it has to do is to get on with introducing the euro, seems curiously complacent.

To say this is not to claim, as the British europhobes would, that the advent of the euro will be an immediate and unmitigated disaster. There will be pockets of immediate difficulty, and some of us believe that ultimately, some years down the line, the currency union will break up. But in the short term bringing in a new currency is as likely to stimulate the various European economies as to depress them. But it does add a new uncertainty, for never before in human history have a group of countries brought in a single currency without agreeing on a degree of political union first. There are no maps for a journey such as this.

The effect, therefore, is to create an even more widespread vacuum at the top. Ask where power normally resides in the world - economic power, that is, rather than military power. The key players have been the finance ministers and central bank governors of the Group of Seven countries, and the most important people within that group have been in the US, Germany and (since they would usually help pay for US initiatives) Japan.

Now, while the US has an exceptionally competent Treasury Secretary in Robert Rubin, ex-Goldman Sachs senior partner, he is part of a somewhat tarnished Administration, and apparently would like to resign when things are smoother. That leaves Alan Greenspan at the Fed, also an extremely able man. But beyond that, who is there? The German government seems about to change, with elections this weekend, and the Bundesbank, that great rock anchoring price stability in Europe, is about to cede many of its powers to the ECB. Japan is so mired in the problems of its own economy and its banking system, that it cannot help much in the East Asian region, let along in the rest of the world.

France and Italy are relative bit players, with finance ministers who do not carry much clout outside their own country, and central bank governors who are about to lose their main function.

As for ourselves, well, we will be politely listened to, but as anyone who has reported on international monetary conferences realises very fast, we only have influence when we do something (like privatisation) which is imitated elsewhere.

Our economic management is more admired now that it was a decade or two ago, and this present government is admired for its political genius. But we would be kidding ourselves if we think we really have clout in the world of international economics.

This is a bad time for the world to have a power vacuum. There is clearly going to be some sort of more general economic downturn. In an ideal world, Europe would either have got the euro up and running during the present expansion, or postponed it until we were through to the next one. As it is, it will be brought in at the worst possible time. Only in the last few days has this alarming truth begun to strike home.

Arts and Entertainment
Innocent victim: Oli, a 13-year-old from Cornwall, featured in ‘Kids in Crisis?’
TV review
News
Northern exposure: social housing in Edinburgh, where Hassiba now works in a takeaway
books An Algerian scientist adjusts to life working in a kebab shop
Arts and Entertainment
Terminator Genisys: Arnie remains doggedly true to his word as the man who said 'I'll be back', returning once more to protect Sarah Connor in a new instalment

 

film review
Arts and Entertainment
Relocation, relocation: Zawe Ashton travels the pathway to Northampton
Arts and Entertainment
BBC Three was launched a little over five years ago with the slogan: “Three, is a magic number, yes it is.”

BBC Trust agrees to axe channel from TV in favour of digital move

TV
Arts and Entertainment

festivals
Arts and Entertainment

Final Top Gear review

TV
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment

ebooksNow available in paperback
Arts and Entertainment

ebooks
Arts and Entertainment

music
Arts and Entertainment
Pete Doherty and Carl Barat perform at Glastonbury 2015

music
Arts and Entertainment
Lionel Richie performs live on the Pyramid stage during the third day of Glastonbury Festival

music
Arts and Entertainment
Buying a stairway to Hubbard: the Scientology centre in Los Angeles
film review Chilling inside views on a secretive church
Arts and Entertainment
Jason Williamson, left, and Andrew Fearn of Sleaford Mods
musicYou are nobody in public life until you have been soundly insulted by Sleaford Mods
Arts and Entertainment
Natalie Dew (Jess) in Bend It Like Beckham The Musical
theatreReview: Bend It Like Beckham hits back of the net on opening night
Arts and Entertainment
The young sea-faring Charles Darwin – seen here in an 1809 portrait – is to be portrayed as an Indiana Jones-style adventurer
film
Arts and Entertainment
The audience aimed thousands of Apple’s product units at Taylor Swift throughout the show
musicReview: On stage her manner is natural, her command of space masterful
Arts and Entertainment
Channel 4 is reviving its Chris Evans-hosted Nineties hit TFI Friday

TV
Arts and Entertainment
Harrison Ford plays Indiana Jones in The Last Crusade (1989)

film
Arts and Entertainment

music
Arts and Entertainment
A Glastonbury reveller hides under an umbrella at the festival last year

Glastonbury
Arts and Entertainment

music
Arts and Entertainment
Miles Morales is to replace Peter Parker as the new Spider-Man

comics
Arts and Entertainment
The sequel to 1993's Jurassic Park, Jurassic World, has stormed into the global record books to score the highest worldwide opening weekend in history.

film
Arts and Entertainment
Odi (Will Tudor)
tvReview: Humans, episode 2
Arts and Entertainment
Can't cope with a Port-A-loo? We've got the solution for you

FestivalsFive ways to avoid the portable toilets

Arts and Entertainment
Some zookeepers have been braver than others in the #jurassiczoo trend

Jurassic WorldThe results are completely brilliant

Arts and Entertainment
An original Miffy illustration
art
Arts and Entertainment
Man of mystery: Ian McKellen as an ageing Sherlock Holmes
film review
Latest stories from i100
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.

    John Palmer: 'Goldfinger' of British crime was murdered, say police

    Murder of the Brink’s-MAT mastermind

    'Goldfinger' of British crime's life ended in a blaze of bullets, say police
    Forget little green men - aliens will look like humans, says Cambridge University evolution expert

    Forget little green men

    Leading evolutionary biologist says aliens will look like humans
    The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

    The Real Stories of Migrant Britain

    An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
    Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

    Dying dream of Doctor Death

    Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
    UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

    39.8 degrees recorded on Tube

    There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
    Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

    Computerised cooking is coming

    From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
    Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

    Jessie Cave's feminist cartoons

    The Harry Potter star tells Alice Jones how a one-night stand changed her life
    Football Beyond Borders: Even the most distruptive pupils score at homework club

    Education: Football Beyond Borders

    Add football to an after-school homework club, and even the naughtiest boys can score
    10 best barbecue books

    Fire up the barbie: 10 best barbecue books

    We've got Bibles to get you grilling and smoking like a true south American pro
    Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

    Nick Bollettieri's Wimbledon Files

    Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
    Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

    ‘This is one of the best McLaren teams ever – we are going to do it’

    Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
    Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

    Making of a killer

    What motivated a shy student to kill 38 holidaymakers in Tunisia?
    UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

    Just when you thought your commute couldn't get any worse...

    Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
    Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

    The Real Stories of Migrant Britain

    Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
    Cheaper energy on the way, but it's not all sunshine and rainbows

    Cheaper energy on the way, but it's not all sunshine and rainbows

    Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most