Dominic Lawson: The fate of the euro is the chronicle of a death foretold

The outbreak of mutual blackmail exposes how the euro has made the nations more divided

Dominic Lawson
Tuesday 15 May 2012 00:03

What began with solidarity is ending in blackmail threats. Everyone associated with the acceptance of Greece into the eurozone knew that it had fiddled its budgetary figures to appear compliant with the terms of the Maastricht treaty that set up the euro; but this was thought of minor importance compared with the greater mystical truth of pan-European harmony via common banknotes. The non-compliant Italians had earlier been let in to the club for the same reason, so the argument went: why discriminate against our Greek cousins, descendants of the very inventors of democracy?

Now the German government has long stopped paying homage to the glories of Athenian culture, and instead bluntly declares: cut your budget as you promised or you will be out of the euro – and even the European Union. Last week, a spokesman for the Syriza coalition, the big gainer in the recent Greek elections, retorted that European finance ministers, led by Germany's implacable Wolfgang Schäuble, had no choice but to let Greece get the next tranche of the €246bn bailout even without Athens agreeing to any further public expenditure cuts, because: "If we left the euro, the financial markets would attack Italy next."

Or, in other words: "Nice little currency you've got, Wolfgang; pity if anything were to happen to it." Indeed, it has seemed a wonderfully benign currency for the Germans. By having effective exchange rate parity with its much less competitive southern European neighbours, Germany has built up an enormous trade surplus within the eurozone, to the great joy of its exporting industries. Yet the idea that this has been good for all Germans – and that, therefore, they can be blackmailed in perpetuity – is mistaken. Those vast German surpluses have been recycled into a credit boom in the rest of the eurozone – and where do you think much of the improbable sums of money squandered on speculative Spanish property has come from? The situation is painfully similar to that now confronting China, which, also seeking to benefit as an exporter from an undervalued currency, found itself massively exposed to losses on its vast accumulated dollar deposits.

In fact, it was North American economists who were in the forefront of predicting disaster for the euro (and not just we British sceptics, derided as tweedy "anti-Europeans"). In the year the Euro was launched in virtual form, 1999, Robert Mundell of Columbia University won a Nobel Prize for his work on "optimal currency zones". He had pointed out that a successful currency zone required complete mobility of labour (but would a Greek leave to work in prosperous Finland when things got bad in Athens?); it would require the business cycle to be aligned throughout the zone (yet Germany was in deep retrenchment in the noughties, causing Euro interest rates to be kept at levels far below what was suitable for booming Ireland, for example); above all, such a currency required some form of central government to make fiscal transfers from the strong parts of the zone to struggling peripheral areas (yet Germany agreed to the single currency only on the understanding that there would not be a fiscal union: her own taxpayers would never have stood for it, and still won't).

Another Nobel Prize-winning economist, the late Milton Friedman, put it even more clearly, back in 1997: "Europe exemplifies a situation unfavourable to a common currency. It is composed of separate nations, speaking different languages, with different customs, and having citizens feeling far greater loyalty and attachment to their own country than to a common market or to the idea of Europe." As Friedman hardly needed to point out to his American readers, currency union in the US took place after, and not before, political union: the right way round.

Naturally, such critiques from the other side of the Atlantic were regarded in Brussels as merely emanations of fear of a united Europe by a jealous rival for economic trading supremacy. The view of the Eurocrats was that the cart really could be put in front of the horse. They wanted political union – a European superstate with a currency to challenge the dollar as the global reserve currency – but knew that the electorates of the individual nations were not remotely ready for such a joint and several abnegation of national parliamentary sovereignty. So the idea was to introduce a common currency – the euro – in defiance of both economics and history, in order to make the peoples involved feel "more European" and, therefore, more receptive to political union at some point in the not-too-distant future.

Yet the outbreak of mutual blackmail threats between Greece and Germany have exposed with shocking clarity how European Monetary Union without proper democratic accountability has actually made individual nations more rather than less divided – precisely as another American economist, Harvard's Martin Feldstein, warned it would back in 1997.

Never fear: some of the original proponents of this grossly irresponsible experiment have come up with a rescue plan for the dream of a united Europe. The former President of the European Commission and the moving force behind the euro, Jacques Delors, the former German Chancellor Helmut Schmidt, and the former Secretary General of the Council of the EU, Javier Solana, are among the eminent signatories of a letter entitled "Let's create a bottom-up Europe". It's a bit of a nerve from people who created a top-down technocratic model of European integration, but, anyway, their new manifesto proclaims: "We, the undersigned, wish to provide a mouthpiece for European civil society... as a counter to the top-down Europe, the Europe of elites and technocrats that has prevailed up to now [and] that considers itself responsible for forging the destiny of the citizenry of Europe – if need be, against its will."

Adapting the great appeal of President John F Kennedy, these creators of the current European system declare – without the slightest sense of irony – that their "aim is to democratise the national democracies in order to rebuild Europe in the spirit of the rallying cry: 'Don't ask what Europe can do for you but ask what you can do for Europe!'". Good luck with that on the streets of Athens.

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