Hamish McRae: We can make the single currency a scapegoat but we can't make a death wish come true

Click to follow
The Independent Online

So was the euro a terrible mistake? Will Germany, Italy and France go back to the mark, the lira and the franc? A string of stories have hit the streets hinting that this may be the outcome following the failure of France and the Netherlands to ratify the European constitution.

So was the euro a terrible mistake? Will Germany, Italy and France go back to the mark, the lira and the franc? A string of stories have hit the streets hinting that this may be the outcome following the failure of France and the Netherlands to ratify the European constitution.

It is easy to see why there should be such speculation, but the eurozone is not going to collapse in the near future. I may be wrong, but my instinct is that while it will eventually unravel, such an event is almost certainly at least a decade away. That said, the debate matters because what was once a no-go subject is now being talked about, and this changes things.

Why the speculation? Well, Italy's welfare minister, Roberto Maroni, gave an interview to la Repubblica in which he suggested that the lira could be reintroduced alongside the euro, at least for a temporary period.

He also suggested: "The Italian people could be asked to approve the reintroduction of the lira through a referendum." And, referring to the European Central Bank governor, Jean-Claude Trichet, he added: "He is one of those chiefly responsible for the disaster of the euro."

To be clear, while Mr Maroni is a minister, his view is not the majority one in the government. Lorenzo Codogno, an economist at Bank of America, to whom I owe the translation, thinks it unlikely there will be an official initiative on these lines - though there may well be other similar outbursts by politicians in the light of the current anti-European wave.

In Germany, Stern magazine reported that Hans Eichel, the finance minister, had met with officials to prepare for a collapse of the euro. Clearly some sort of meeting did take place, and it would in any case be prudent for the German government to have contingency plans. Economics minister Wolfgang Clement admitted the country was paying a high price for euro membership. Some 56 per cent of the German people, according to the polls, would like the mark back.

My own perspective on all this was being in the Netherlands on Wednesday, when the Dutch voted "no". I was talking with a group of business people who were generally in the "yes" camp, but the euro was deeply unpopular. They felt that the Netherlands had converted the guilder at too low a rate, so their money had been "stolen" from them. They also blamed the euro for the subsequent inflation, which I was told was denied by the government at first and only recently accepted as true.

So the conspiracy of silence is over. It is possible to say in public that the euro may not last and may be replaced by national currencies. But that is a long, long way from doing it and there are powerful practical reasons for resisting such a change.

One is there is no easy mechanism for conversion. You could make the paper switch over a weekend - just declare that the Italian euro was initially worth x lire (or marks or francs), that balances should be converted and that henceforth the new lira would float against the euro on the exchanges.

But it would be very messy. Not only would it take months to get the notes and coins into circulation, there would be huge arguments about which euro balances were really Italian ones and which were those of other countries. Would Italian government debt be deemed to be denominated in the old euro or the new lira? The switch could be done - history is littered with examples of currency zones breaking up - but it would be disruptive.

It would be much more disruptive, for example, than sterling leaving the ERM in 1992, or Ireland breaking the link with sterling in 1979. In economic terms, it would be more akin to the end of the Bretton Woods fixed exchange-rate system, which finally collapsed in 1972 when fully floating rates came into practice.

There would be other costs. Countries under pressure to leave would probably do so because they needed a devaluation. While that would help their competitiveness, it would also increase the cost of servicing debt, for longer-term interest rates would almost certainly rise. Capital Economics, which sums up the notion as "high potential impact but low possibility", does note Britain benefited from leaving the ERM, but points out that a devaluation might be used to postpone underlying problems. It could discourage a country from undertaking the sort of structural reforms it needed to, and so make matters worse rather than better.

That leads to the discussion about why the eurozone is under-performing. Is it the fault of the currency or something else? Part of the story is told in the graphs. Until the early 1990s, the eurozone was doing pretty much as well as the US, but since then it has fallen back (first graph). The slip has been particularly marked since 1992 (next one), though that is partly because Europeans, who used to work longer hours than Americans, have worked shorter ones since the mid 1990s (third graph).

Beyond this, though, ABN Amro argues that the failure to develop and apply ICT (information and communications technology) explains much of the shortfall. Some of the rest is explained by excessive regulation, some by the barriers to entrepreneurship.

One could add that the UK, which is much closer to the US in its adoption of ICT and in its fostering of entrepreneurs, has grown since the early 1990s at pretty much the same rate as the US.

Where does the euro come into this? The point is that something went wrong in much of Europe before it was introduced. This was largely hidden by the late-1990s boom and it was only when much of the Continent failed to recover fully from the post-2000 flop that we realised something was seriously wrong. I think the "one-size-fits-all" eurozone interest rate has made matters worse, because it gives slow-growing Germany and the Netherlands too high a rate and so restricts domestic demand. It also gives fast-growing Spain too low a rate and has led to inflation there. But it is not fair to lay the main blame for the under-performance up until now on the euro. Looking ahead, the rigidities it imposes may make things tougher for Europe, but that is in the future.

So what will happen? My guess is that the eurozone will survive the current fracas. And in all probability it will survive the next global downturn in - who knows? - three or four years' time. There is such huge political capital invested in it that for it to be swept away so suddenly would be astounding. My guess is that the real test will be the downturn after that, say about 2017, or maybe even the one beyond that.

Ultimately, the euro will be seen in similar terms to Bretton Woods: a system that seemed to many to be right at the time, but one whose internal tensions were such that eventually it would be replaced. But don't write the obits just yet.

Two reasons for optimism about Africa

What is to be done for Africa? The Live8 concerts in four weeks' time, and the threat of a million protesters in Edinburgh during the G8 summit at Gleneagles, will focus attention on the poorest nations. The British Government has its own proposals for increasing aid and writing off debt - so you can be sure that some top-down initiatives will accompany the raised expectations.

But the test will be whether, in 20 years' time, the poorest nations, particularly those in sub-Saharan Africa, have closed the gap - not just with the developed world but with the two giants of China and India. Their success - growth rates of 9.4 and 6.2 per cent over the past year - highlights the lack of progress in much of Africa. But quite aside from whatever emerges from the G8 process, two reasons for modest optimism are worth noting.

One is that global demand for commodities and oil helps parts - not all - of sub-Saharan Africa. South Africa, Zambia and Botswana are important mineral producers. And Africa accounts for some 12 per cent of global oil production, with Nigeria the biggest single producer. While raw-material wealth can be a curse, if it discourages countries from building up other forms of economic activity, the surge in wealth does supply resources that, wisely used, can help build infrastructure and lay the basis for sustained growth.

The other is the business support at the Africa Economic Summit, which closed in Cape Town on Friday. According to the World Economic Forum, some 350 African company leaders have endorsed the Commission for Africa recommendations that will go to the G8. Ultimately, it will be the African business community which drives the continent's growth, just as it has been that community in China and India which has catapulted those countries forward. Business support is one thing but words are cheap. If it is followed by business performance, there will be a reason for real optimism.

Comments