Was the Labour Government right to say no to the euro in 2003? With the benefit of hindsight, the answer must be yes. Not because it is wrong to have a common currency – or for Britain to be part of that currency on the right terms – but because the euro, since the ill-starred Treaty of Maastricht, has been shown to be a currency union which cannot work.
Its weaknesses are being demonstrated on a daily basis. Those weaknesses – and the chronic inability of European leaders to address them – may trigger an even more serious economic downturn, damaging not just the 17 member states who use the euro but also those, like Britain, for whom the European economy is a major trading partner. Europe is in a mess, but there should be no rejoicing because the problems which a broken currency system creates affect us all.
The intriguing question is whether out of the ashes will come a new common currency which embodies the viability the euro lacks. And if that happens should
we then be prepared to join in our own long-term interests.
David Marsh’s excellent history of the euro, now updated to include the events of the first half of 2011, is a masterful summary of the high ambitions behind the currency and the unwillingness and inability of Europe’s leaders to acknowledge and deal with the flaws in the system. It is written not from a partisan perspective on either side of the European argument but by an economic journalist intimately familiar with European policy making and, in particular, the workings of the German system, including the all-powerful Bundesbank.
The core problem, as Marsh makes clear, is that a single currency is impossible without a single government. To successfully manage a currency requires control of the levers of
economic power – interest rates, tax and social policy. Such control, in turn, requires legitimacy. Choices have to be made and tough decisions taken.
The euro has none of these behind it. There is no economic government and the Commission, the nearest thing, is ridiculed in Berlin and Paris. There is no gathering of the policy levers in any single place. The euro is legal tender in 17 countries but each of those countries is following a different set of policy objectives. Pretending to be able to operate a single currency in such circumstances leads to disaster; the only surprise is that it took so long.
Problems flow from the opportunity a single currency gives weak countries to borrow excessively by creating the illusion that all debts are guaranteed by others within the European Union which, in practice, means Germany and a few of the successful economies of northern Europe. In recent months that illusion has been broken. Greece and others over borrowed and, in the end, the Germans ran out of the patience and political will to pay. Germany never intended the EU to be a transfer union.
So what next? European leaders are coming to terms with the fact that the currency markets have recognized the inherent weaknesses and contradictions of the euro. Freed of illusions, the markets will find it hard to accept formulae strung together at desperate summits. The view of the markets is clear – either the euro should break up, with individual countries again responsible for their own economic affairs, and currencies, or there should be a political union with the power to manage a common currency.
David Marsh makes no prediction. On the evidence of the last few months, the odds favour disintegration. Economic circumstances across the EU are now so far apart that a common policy is unattainable. A German-style policy applied in Spain or Greece would bring unemployment of not 20 per cent but 30 or
40 per cent – which is politically and socially unacceptable.
Completely abandoning the euro would be very hard for Europe’s leaders and the most likely outcome is the emergence of a euro core, led by the Germans and managed by the Bundesbank, of strong, well-disciplined economies based on real industrial strength while the rest return to their own currencies, albeit with common trade.
The rest would still face problems which would only be partially offset by their renewed ability to devalue. Those who wish could pursue a rigorous programme of reform which could mean a return to the euro in due course. This, it seems, is the unstated strategy of the Bundesbank.
What should Britain do? Rejoicing in Europe’s weakness is no answer at all. In practice, a strong euro would be a very interesting proposition. Membership of a system which was really working, and which was grounded in strong common values, including the values of social solidarity, could be very attractive – and a serious alternative to isolation or an unsustainable tie to a declining America
