Europe goes to the polls tomorrow and the mood is sour. It is sour among voters and it is sour in the markets, where the sell-off at the end of last week was prompted by fears that the election results would open a new chapter in the Eurozone crisis. This looks all too likely. Despite all the bullish talk in recent months, the problems of the Eurozone have not gone away. The single currency’s weaker members, such as Greece, Spain and Italy, found it easier for a while to sell their bonds at lower interest rates. But that was largely due to the generosity of the Federal Reserve, which flooded the global economy with dollars through its quantitative easing (QE) programme.
The QE injection was a godsend to the Eurozone, which has so far (but perhaps not for much longer) scorned the idea of turning on the electronic printing presses. American dollars found their way through the global financial system into European bond markets. This allowed Mario Draghi, the president of the European Central Bank, to say he would do whatever it took to save the euro, without actually having to back his words with action.
This new version of the post-war Marshall plan bought the Eurozone some time. What it did not do, however, was change the core economic problem of the Eurozone’s weak periphery: They are not growing nearly fast enough to prevent their debts becoming more onerous. Generalised austerity has made matters worse, as has the lack of sufficient offsetting action from the European Central Bank. Unemployment is high and voters are sick of austerity. It will be a mistake, though, to imagine that much — or indeed anything — will change as a result of the elections to the European Parliament. There will be a lot of talk about how Europe needs to deliver for its people, and that will be it. Mainstream parties with their mainstream thinking will still be in charge and life will go on as before. As a result, Europe will condemn itself to an even longer period of economic stagnation, mass unemployment and austerity. Extremism will flourish.
There is an alternative to this depressing scenario: Admit that it was a mistake of historic proportions to use the euro as a way of advancing the cause of ever closer union. Accept that and it is possible to avoid Europe becoming the new Japan. One of two things could happen. The euro could be reformed fundamentally along the lines proposed by Charles Grant, director of the Centre for European Reform. This will involve throttling back on austerity, creating a banking union, structural reform in countries such as Italy to make them more competitive, a rejigging of the German economy to make it less export focused, and a partial debt amnesty for the most heavily indebted Eurozone members.
The alternative is to break up the single currency, devolve power back to individual nations or groups of states with convergent economies and start again. This is not going to happen, at least not yet. The euro symbolises the ever closer union dreamt of by Europe’s founders back in the 1950s. Germany is Europe’s strongest economy and its paymaster, so the euro is run along German lines.
As the economist Roger Bootle puts it in his new book, The Trouble with Europe: “The euro has been an economic disaster, imposed on Europe for political reasons. Ironically, it was thought that whatever its economic costs, it would at least bring Europe together politically. This may yet happen, but equally it could prove to be what drives Europe apart. From where I stand, the latter seems more likely.”
Bootle is right on every count. The euro has indeed been the economic disaster that some predicted when it was created at the end of the 1990s. There were warnings at the time that the single currency would prove to be a job-destroying machine. There were warnings, too, that many of the countries being yoked together were not ready for a one-size-fits-all monetary policy.
It seemed glaringly obvious that countries stripped of the power to conduct their own monetary policy would — in the absence of labour mobility and large-scale redistributions — have to resort to austerity if they became uncompetitive. All of this went unheeded. The euro, it was confidently predicted, would make Europe more prosperous and by doing so would create the conditions for ever closer union.
The reality has been slow growth, high unemployment, botched structural reform, drift and growing discontent. Problems have arisen not just on the periphery but in the core, where economic performance has deteriorated markedly since the creation of the single currency.
What happened, briefly, is this. The euro meant a single interest rate and a single exchange rate. The interest rate was too low for some countries, such as Ireland and Spain, which were growing fast. It was too high for countries such as Germany and France, which were growing less quickly. On the fringe, low interest rates encouraged property speculation and led to conditions in which inflation was higher than at the core.
Before the creation of the euro, these countries would have let their currencies fall to compensate. That was now impossible so they became less competitive at a time when Germany was busy making itself more competitive. For a decade, German workers took below-inflation wage increases to price their goods back into European markets. This was highly successful, up to a point. Germany’s trade surplus soared, but the flipside was that trade deficits in countries such as Spain, Greece and Italy worsened.
In the years before the crash, the system was kept going because Germany exported capital to the countries on the periphery to allow them to buy German goods. Then came the crisis. Germany insisted that if countries were in trouble, it was because they had lived beyond their means. This was a bit rich, given that Germany had been complicit in allowing them to do so.
Berlin said it would help, but only on its own terms, which involved every country replicating Germany by squeezing domestic demand and promoting exports to become more competitive. This was clearly a logical impossibility since one country’s surplus is another country’s deficit. Countries could not become more competitive through devaluation, so they had to do so by austerity, cutting wages and public spending aggressively. At Germany’s insistence, there was no austerity for the banks.
Europe’s leaders consider the euro too big to fail. They are wrong. It is already failing. It is failing to deliver the promised economic prosperity and it is failing to bring Europe together politically. The euro is like the gold standard, but worse, which is why it would be a mistake of historic proportions to ignore this week’s votes. We know how this movie ends.
— Guardian News & Media Ltd
