For the past few months in Britain, the euro has been the subject of highly-charged and Anglocentric election rhetoric.
For the past few months in Britain, the euro has been the subject of highly-charged and Anglocentric election rhetoric. It has been seen as a purely domestic issue, turning on the question of whether or not it is in our national interest to adopt it as our currency or not. In the past few days, the value of the pound has fallen against the euro and the dollar in the expectation that a referendum on joining would be held sooner rather than later.
We ought to step back, however, and review the first 18 months of the new currency itself from the broader perspective of the European Union as a whole. Whatever decisions we British make about our membership of the currency union, the economic health of the Eurozone is going to be one of the largest determinants of our future prosperity. In or out of the currency, we have an interest in the success of what is increasingly a single European economy, of which we can be a more or less integrated part, but from which we cannot hope and should not want to insulate ourselves.
The truth is that the euro has already been a success. The launch went smoothly. Capital markets in most of Europe have been priced in euros without a glitch. The problems of adjustment in the peripheral economies most marked in the case of Ireland have been the sort of problems of which Keynesians used to dream in the bad old days, of rapid growth and full employment. Inflation in Ireland briefly hit 6 per cent, but has already fallen back towards 4 per cent, and, unlike in the bad old days, this is not going to lead to devaluation and a period of bust to correct the overheating of the boom.
More worrying has been the rise in inflation across the Eurozone as a whole, to an average of nearly 3 per cent. That is above the target range for the European Central Bank, of between zero and 2 per cent, which means the authorities in Frankfurt ought in theory to be raising interest rates. Instead, they have cut them recently and yesterday left them unchanged. Fortunately, the central bank is in practice pursuing the sensible policy of targeting trends in the underlying rate of inflation, regardless of its formal obligations. It knows as well as anybody else in the market that Eurozone inflation will come down when the rises in oil prices over the past 12 months drop out of the figures.
That highlights the main weaknesses of the euro in its first year and a half, which are the confused brief given to the European Central Bank by the Eurozone countries, and the poor leadership of Wim Duisenberg in making that confusion worse. In all this, the Euro-zone nations have been lucky. The main effect of the lack of confidence of the markets in the new currency has been to depress its value, which has helped exporters from the Euro-zone with few corresponding ill-effects. A subsidiary effect has been that the value of the pound has been high in relation to the new currency, which makes life difficult for manufacturing industry in this country. The scale of those difficulties was underlined by yesterday's figures which showed manufacturing output dropping by nearly 1 per cent in April.
The experience of the past few days underlines the common interest in this country, among eurosceptics and euro-enthusiasts alike, of strengthening the European Central Bank. The pound needs to come down in relation to the euro, or the euro needs to go up. That means replacing Mr Duisenberg as soon as possible and learning the lessons of the past 18 months of the need for more open decision-making.
Whatever happens to the pound, it is to be hoped that the euro goes from strength to strength.Reuse content