Gianpaolo Rossini - 12/ 2011

As we inch towards the tenth anniversary of introducing the euro, Europe has lost some of the gloss it had when a bright new currency came into service in January 2002. That event was dressed in rhetoric and enthusiasm, masking the real cost of cancelling all trace of national monetary sovereignty. The richest countries in the Eurozone welcomed union as it would make intra-European exchanges less expensive and peg currencies that had tended periodically to devalue and thus make northern Europe less competitive. The weaker countries, for their part, were seeking a political anchor beyond mere EU membership, putting their economies on a more stable financial footing. For some states like Italy the main advantage was a reduction in interest rates: it would be less costly for the public sector to claw its way out of debt. To the private sector the advantages were more hit and miss: since institutions were likely to improve, markets would become more efficient as transaction costs dropped. To the consumer the benefit might come from there being more competition over goods and services markets, and hence a drop in prices. Some of these advantages were to prove a mirage: for example, greater market competition. Consumers had to cope with a whole range of consolidation processes in finance and banking services as the big operators moved in. The same more or less applied to many manufacturing sectors. The real cost efficiency of the euro is hence nebulous. The chief advantage was clearly the lower incidence of the public debt as interest rates converged all over the currency union. In the first year or so Italy’s interest rates actually resembled Germany’s (the lowest). Though this was only partly true, the fact is that, like other countries, Italy found a sizable improvement in the cost of having a public debt, and this lasted at least six years until 2008. Unfortunately, right from 2002 the price of this operation proved high, above all for countries whose international competitiveness could not match Germany’s. As soon as the single currency began to circulate, a massive and well-nigh continuous process of appreciation versus the dollar set in. In the course of a decade the euro revalued by nearly 100% - from just over $0.8 per euro in late 2000 to almost 1.6 in spring 2009. This soaring currency exchange gradually destabilised the balance of payments in Greece, Spain, Portugal and Ireland. It has been the prime cause of Italy’s low growth these last ten years. It made a mockery of her efforts to bring down the public debt. Appreciation of the euro has also claimed victims among the stronger countries: France, for one, where criticisms of ECB policy have often been voiced. The fortunes of the euro have been linked to the policy of the European Central Bank which has always taken the line of non-intervention on the exchange market. Nor did its monetary policy ever try and neutralise the impact produced on the exchange rate in the first decade of the millennium by the euro progressively being taken as an international reserve currency competing with the American dollar. In summer 2007 when rumbles from the American finance market were beginning to be heard and the ‘Fed’ started taking measures accordingly, the ECB went blithely ahead with its restrictive policy which, in the space of two years, would take the exchange rate from 1.25 to nearly 1.60 in April 2010. That same summer, shortly after the Greek crisis blew up and the euro sank to a more acceptable rate (c. 1.20), the ECB took the restrictive measure of raising the interest rate in alarm at signs of inflation – something only the sharp-eyed economists of Euro-tower had detected. No matter that meanwhile across the Channel and the Atlantic they were doing the exact opposite: flooding the markets with liquidity by buying private and public bonds regardless of merit, quality or issuing source. Amazing to say, it was only outside Europe that people grasped the gravity of the moment and saw where the May 2010 crisis might be dragging us. In Frankfurt they were confident the worst was over. That Greece might collapse was not deemed to be a possible and dangerous source of contagion but a salutary lesson, a tiny financial holocaust that all in all served a purpose: of forcing other European countries to adopt a more restrictive fiscal policy. In short, the same benighted thinking that drove Lehmann Bros to collapse we are now importing into Europe and applying to a whole country, heedless of the expansive monetary policy that other countries have been following in order to help with sovereign debts. This clear-cut separation between Franco-German policy and that of the US; Britain and Japan is perhaps the crux of Europe’s problems today: the lack of a pragmatic and non-doctrinaire attitude, such as prevails in the USA and elsewhere, is undermining not just the currency union but the European Union itself. As our observatory has already pointed out in previous articles, Europe’s ‘different way’ is having a disastrous effect. One victim has already been immolated on this altar – Greece. Given her small size, if instead of pumping money into German and French banks we had put the same money into a suitable ten-year plan, Greece’s public debt might have returned to politically and socially sustainable proportions. To let her drift and probably drive her out of the Euro is an economic blunder, a source of financial infection throughout Europe with repercussions even on the strong economies.

Gianpaolo Rossini
(University of Bologna)