Sean O'Grady: Will the euroland centre hold?

We Europeans have far less in common than we might think. It has taken the crisis to show us this

There has been plenty of speculation about the dollar and poor old sterling recently – but how has the euro fared in its first big test?

Two years after the onset of the credit crunch, and a decade on from its establishment as a single (though not universal) currency for the European Union, it has survived in better shape than most of its critics predicted.

Its biggest economies – Germany and France – are already out of recession. It is humiliating the dollar. It covers the biggest economic zone in the world. Yet, when it started out it was labelled, by some typically indelicate London forex traders, as a "toilet currency", compromised by fundamental weaknesses in the sclerotic European economies. Even the bank-notes were derided as being too easy to forge. A wave of counterfeits was predicted – that never arrived.

To many even five years ago, the dynamic Anglo-Saxon model still looked a better bet, and the euro languished against sterling and the dollar for a long time. Today, the euro is being talked up as possible replacement for the greenback as a reserve currency for the world.

Nor has the governance of the euro been noticeably inferior to that of its principal rivals. The European Central Bank was designed on the highly successful template provided by the German Bundesbank, a central bank that, alone in the G7 powers, enjoyed a reputation for monetary rectitude. It has not yet been chaired by a German, but the Dutch Wim Duisenberg and, still more conspicuously, the former French central bank governor Jean-Claude Trichet have shown themselves Germanic in mind-set.

The ECB, almost alone among the institutions of the European Union, has a proper job to do and gets on with it unfussily. Indeed many critics say, with the benefit of hindsight, that at least the ECB managed the early stages of the credit crunch more effectively than the Federal Reserve or the Bank of England. Leastways, nothing was done to damage the euro itself, even though the anchor of the Maastricht criteria – low budget deficits and modest national debts – has had to be jettisoned.

Sooner or later, as with our own "golden" fiscal rules, the governments of the eurozone will have to reinstate some sort of credible fiscal framework. The German constitutional amendment to restrict structural annual budget deficits to 0.35 per cent of GDP might be a good pointer.

But those euro successes are only part of the story. One of its main, if often undeclared, aims was to accelerate convergence among European economies. Let us recall here that after half a century of free trade, and another 10 years or so of a single market, the eurozone economies were already pretty integrated – or at least seemed to be. Some of the smaller nations around Germany had been Deutschemark satellite zones long before the euro was dreamt up. The euro should have followed the usual economic logic and made the eurozone nations economies still more integrated and convergent. So did it?

Crude as it is, I've tried to test this by looking at the course of two broad indicators: inflation and unemployment. (Only some nations are shown in the charts, for the sake of clarity). The evidence is a little surprising.

First, as the charts suggest and simple measures of standard deviation confirm, the eurozone economies didn't converge that much even in the good years, when intra-zone trade was expanding. Let's take inflation.

Looking at the difference between the best and worst performers, and the variability of the economies from each other, they did indeed broadly get closer over the first seven years of the euro's existence. Indeed the maximum convergence occurred, eerily, in July 2007, just when the credit crunch was about to bite: the difference between the best and worst inflation performances among the original members of the euro was 1.2 per cent. Spooky. Now the divergence is more severe – around 4 per cent, close to where the eurozone started out.

More telling still, and more dangerous because of its far more destructive impact on social cohesion and politics, is the increasingly alarming disparity in the eurozone's "real" economies. Nowhere is this more apparent than in the unemployment numbers, with Spain in particular registering a disastrous increase. Almost always the worst performer in the western European Union, Spain is now even further from away from the mainstream, with youth unemployment now in excess of 30 per cent. Ireland has joined Spain as an outlier, but the rest of the pack is more spread out than ever before in the euro's history. A decade ago there were 10 percentage points separating the best and worst performers – the Netherlands and Spain. Now there are 15, and between the same two states. So what does this tell us?

Well, it does underline that, although we occupy such a tiny corner of the globe, trading so much with one another, we Europeans have far less in common than we might think. We are very structurally divergent, and it has taken this crisis to show us quite how much.

The reasons are obvious: differences in property, labour, product and capital markets, all far from uniform. The real-estate scenes in Ireland and Germany, for example, might as well be on different planets. The labour markets of the Netherlands and Belgium are bizarrely different, and the differential impact of the credit crunch on different countries' banking systems has also exaggerated differences (though in that respect the Spanish have come off relatively well).

Add to that the many languages, and separate political cultures, and you can see why the eurosceptic case is so persistent. Had the UK joined the euro in 1999, the chances are that we would have converged with the rest of the eurozone no more than Spain has done. This might well have left us too with the wrong level of interest rates for the state of our domestic economy – and the Exchange Rate Mechanism (ERM) experience writ large. Indeed it is perfectly possible that sterling might have dropped out of the euro by now.

Still, the euro is hanging together. The higher yields demanded by the markets on government bonds issued by weaker brethren such as Portugal are evidence enough that the central political problem of the euro has not been expunged.

It is still possible – although the moment of greatest peril has prob-ably passed – for one of the eurozone's members to re-establish its national currency. When some nations manage to control costs more effectively than others, and unemployment and social pain mount elsewhere, the traditional method of adjustment has been currency deprecation. With that safety valve removed, it is difficult to see how nations such as Italy will be able to solve their growth problem, or Spain to dissolve its jobless queues. That isn't an argument for them to leave the euro: merely to note that, as long as they retain their own governments, that option will always exist.

Additional research by Beth Admanson

Suggested Topics
PROMOTED VIDEO
Voices
Chris Grayling, Justice Secretary: 'There are pressures which we are facing but there is not a crisis'
voices

Does Chris Grayling realise what a vague concept he is dealing with?

News
Brian Harvey turned up at Downing Street today demanding to speak to the Prime Minister

Met Police confirm it was a 'minor disturbance' and no-one was arrested

News
Blackpool is expected to become one of the first places to introduce the Government’s controversial new Public Space Protection Orders (PSPOs)
news

Concerns raised phenomenon is threatening resort's image as a family destination

Life and Style
gaming

I Am Bread could actually be a challenging and nuanced title

News
Nigel Farage has backed DJ Mike Read's new Ukip song
i100
Arts and Entertainment
Shia LaBeouf plays a World War II soldier in forthcoming drama Fury
films

Eccentric Fury star, 28, reveals he is 'not a really confident actor'

News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
Time and Oak have developed a product that allows drinkers to customise the flavour and improve the quality of cheaper whiskey
food + drink

Sport
football

Peter Biaksangzuala died from his injuries in hospital on Sunday

Life and Style
The final 12 acts will be facing Simon Cowell, Cheryl Fernandez-Versini, Mel B and Louis Walsh tonight
fashion

The X Factor's judges colourful outfit was mocked by Simon Cowell

News
news

Footage shot by a passerby shows moment an ill man was carried out of his burning home

News
people
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Customer Service Executive / Inbound Customer Service Agent

£18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

ASP.NET Web Developer / .NET Developer

£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Project Coordinator - 12 month contract

£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

Day In a Page

Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

How We Met: Hugh Bonneville & Peter James

'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

Bill Granger's heavenly crab recipes

Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
Radamel Falcao: How faith and love drive the Colombian to glory

Radamel Falcao: How faith and love drive the Colombian to glory

After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

Terry Venables column

Premier League managers must not be allowed to dictate who plays and who does not play for England
The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

Michael Calvin's Inside Word

Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past