The slow burn of the euro

Money is the strangest of commodities. Sometimes it moves fast; other times, with glacial slowness
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The Independent Culture
IT IS hard, on this occasion, not to agree with Charlie Whelan.

The soon-to-depart press secretary of the Chancellor said yesterday that it "could not be right" that his own activities should attract more press attention than the launch of the euro. In 25 years' time the brief Whitehall career of a press officer will hardly warrant a footnote in the history of politics in the UK - it will get the footnote only if it becomes an early sign of the unravelling of what appeared to be a promising government.

The euro, on the other hand, will be a major feature in the history books for generations to come. At one extreme, children may be learning that the year 1999 was a key date in the creation of the United States of Europe, just as 1776 was a key date in the creation of the United States of America. At the other extreme, they may learn that this was the equivalent of the Treaty of Versailles in 1919, a botched political decision that helped to push Europe along a slide to catastrophe.

Or maybe (and this is my own expectation) they will learn that it was an interesting monetary experiment, like the Bretton Woods fixed exchange rate system of 1944, that worked for a while reasonably well - and then fell to bits after lasting less than a generation.

Yesterday everyone involved with the euro was congratulating each other at its smooth launch. In fact there were only two things that might have gone wrong. One was some kind of technical failure as a result of loading a new currency on to the computers of the world's banks. It didn't, which is unsurprising when you consider the considerable technical competence of big banks. They are terrific at the actual mechanics of banking - it is in lending billions to Russia (or whoever) that they screw up.

The second was the possibility of some kind of speculative attack. For example, the irrevocable locking together of European currencies might encourage holders of one (say the Italian lira) to bail out and pile into another (say the German mark) on the grounds that the locking together might not be so irrevocable after all. But the fact that this, too, failed to happen is also unsurprising, for there is no reason why it should happen now as opposed to in a year or two.

Money is the strangest of commodities. Sometimes it moves with astonishing speed: currency rates change, interest rates change, stock-market prices soar and plunge, giant projects are financed, countries default on their debts. All this can happen in a few minutes, occasionally in a few seconds.

At other times it moves with glacial slowness. Those of us who were taught our economics in the Sixties were told that currencies were fixed together and also fixed to gold. That was the world system, a global agreement that had underwritten the post-war recovery by giving international traders the currency stability that they needed to plan production, trade and so on. This was in contrast to the bad old days of the inter-war period when currencies floated, countries devalued to obtain a competitive advantage, protectionism rose and trade collapsed.

Tensions within this system were evident almost immediately, for sterling was over-valued and had to be devalued in 1949. Strains increased during the Sixties and the system finally fell to bits in 1972. But the key lesson is that it took years for those pressures, which were evident at the start, to break through. Political will can resist financial forces for a long time.

So it is terribly important now to ignore both the hype and the hatred: that the euro project is bound to be a success because it has started so smoothly, or that it is bound to fail because the people at the European Central Bank are incompetent.

Both views are wrong. Even if it runs smoothly for many months, even years, that does not ensure its survival. However, even if it were managed moderately incompetently, it could still last for years. The economies of developed countries are pretty robust animals: you can throw quite a lot of incompetence at them and they still manage to survive. Look at the way they scrambled through the collapse of the fixed rate system and the great inflation of the Seventies and Eighties.

So what should we think? Leave aside for the moment the contentious issue of whether Britain should join, which is really a separate decision involving sovereignty as well as finance and economics. What we should try to do is to see this venture in a long historical context and then - in the months and years ahead - look for clues as to how the advantages it confers and the tensions within it will play out.

The euro represents a powerful unifying force in an area that has not had a single currency for some 1,500 years - not since the Roman empire. The fact that the money is the same on different sides of a border inevitably binds the economies on each side more closely together. So the continental European economy will inevitably become more closely integrated as the years go by.

This inevitability stems from (sorry about the expression) price and wage transparency - the fact that both companies and individuals will be able to see the differences in wages and prices in different parts of the Continent. Sure, at the moment anyone with a calculator can work this out pretty fast, but not having to work it out at all really does change things.

How will transparency affect Europe? Well, of course we have no folk memory of the Roman empire, but we can look back at the early Fifties here, before the surge of international trade changed our lives. Things we bought were made here: if you wanted a car or a TV set you bought a British one because that was the only sort available. Now it is impossible to buy either.

But not all services are similarly traded. We still have bank accounts, mostly, in British banks. So continental Europe will be faced with a wave of cross-border trade not just in goods but also in services. Companies that are uncompetitive (like our car makers) will gradually disappear. Companies that are good will tend to take over. The single European market will make another leap forward, and though there will be winners and losers the overall efficiency of the European economy will undoubtedly rise as a result.

This will create tensions. To take another analogy, look at our local high streets. Stand in Inverness and you see the same stores as you do in Plymouth. That homogeneity has not yet happened on the Continent, but it will. Will Europeans feel comfortable about the practical aspects of economic integration, in particular the fact that local companies may fail as outsiders come in?

People will move more, too, as individuals can compare wages more directly and companies can more easily scour a larger market for talented staff. Again, the overall economic effect will be for more efficiency, but will continental Europeans feel comfortable about the migration that will result - "their" people losing jobs to outsiders?

I suspect that in the early years of the euro, these practical tensions will prove more difficult to contain than the more abstruse concerns about an interest rate being set by a committee in Frankfurt, rather than by a local central bank or finance ministry. Look 10 or more years forward and the pressure could become enormous. But if euroland does get through the next three years and succeed in exchanging all the marks, francs, lire and so on for euros, then do not expect the thing to break up swiftly thereafter.

Money is only money. People do adapt surprisingly fast to having a different kind of the stuff in their pockets and their bank accounts. We have, after all, had to adapt to the fact that our money now is worth less than 10 per cent of what it was worth 30 years ago. That is a much bigger adjustment than the shift from one currency to another.

So what happens in the next few weeks is no guide, positive or negative, to the future. Beware the euro-euphoria. Beware, too, the euro-sneers.