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
Call The Midwife: Miranda Hart as Chummy

tv Review: Miranda Hart and co deliver the festive goods

Arts and Entertainment
The cast of Downton Abbey in the 2014 Christmas special

tvReview: Older generation get hot under the collar this Christmas

Arts and Entertainment
Dapper Laughs found success through the video app Vine

comedy Erm...he seems to be back

Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)

tvReview: No ho-ho-hos with Nick Frost's badass Santa

Arts and Entertainment
Bruce Forsyth and Tess Daly flanking 'Strictly' winners Flavia Cacace and Louis Smith

tv Gymnast Louis Smith triumphed in the Christmas special

Arts and Entertainment
Rhys says: 'I'm not playing it for laughs, but I have learnt that if you fall over on stage, people can enjoy that as much as an amazing guitar solo'
musicGruff Rhys on his rock odyssey, and the trouble with independence
Arts and Entertainment
Krysia and Daniel (Hand out press photograph provided by Sally Richardson)
How do today's composers answer the challenge of the classical giant?
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment

ebooksNow available in paperback
Arts and Entertainment

Shenaz Treasurywala
Arts and Entertainment
Jason Watkins as Christopher Jefferies
Arts and Entertainment
Star Wars Director JJ Abrams: key character's names have been revealed
Arts and Entertainment
Pharrell Williams won two BBC Music Awards for Best Song and International Artist
Arts and Entertainment
Mark, Katie and Sanjay in The Apprentice boardroom
Arts and Entertainment

Film The critics but sneer but these unfashionable festive films are our favourites

Arts and Entertainment
Frances O'Connor and James Nesbitt in 'The Missing'

TV We're so close to knowing what happened to Oliver Hughes, but a last-minute bluff crushes expectations

Arts and Entertainment
Joey Essex will be hitting the slopes for series two of The Jump


Who is taking the plunge?
Arts and Entertainment
Katy Perry as an Ancient Egyptian princess in her latest music video for 'Dark Horse'

Arts and Entertainment
Dame Judi Dench, as M in Skyfall

Arts and Entertainment
Morrissey, 1988

Latest stories from i100
Have you tried new the Independent Digital Edition apps?

ES Rentals

    Independent Dating

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

    Aren’t you glad you didn’t say that? The worst wince-and-look-away quotes of the year

    Aren’t you glad you didn’t say that?

    The worst wince-and-look-away quotes of the year
    Hollande's vanity project is on a high-speed track to the middle of nowhere

    Vanity project on a high-speed track to nowhere

    France’s TGV network has become mired in controversy
    Sports Quiz of the Year

    Sports Quiz of the Year

    So, how closely were you paying attention during 2014?
    Alexander Armstrong on insulting Mary Berry, his love of 'Bargain Hunt', and life as a llama farmer

    Alexander Armstrong on insulting Mary Berry and his love of 'Bargain Hunt'

    From Armstrong and Miller to Pointless
    Sanchez helps Gunners hold on after Giroud's moment of madness

    Sanchez helps Gunners hold on

    Olivier Giroud's moment of madness nearly costs them
    A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

    Christmas without hope

    Gaza fears grow that conflict with Israel will soon reignite
    After 150 years, you can finally visit the grisliest museum in the country

    The 'Black Museum'

    After 150 years, you can finally visit Britain's grisliest museum
    No ho-ho-hos with Nick Frost's badass Santa

    No ho-ho-hos with Nick Frost's badass Santa

    Doctor Who Christmas Special TV review
    Chilly Christmas: Swimmers take festive dip for charity

    Chilly Christmas

    Swimmers dive into freezing British waters for charity
    Veterans' hostel 'overwhelmed by kindness' for festive dinner

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect