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Beware, The Euro Is Doomed 2 January 2007

Posted by David in Europe.

Yesterday Slovenia joined the Euro, more fool them. As the New Year rang in across the globe, the currency once sold to the public as “inevitable” continued to slowly unravelling at the seams. The Telegraph leader said it all;

“When the euro notes and coins were launched five years ago today, the question was who would be the next to join; now it is who will be the first to leave. Of the 15 EU members on January 1, 2002, it is the three that stayed out — Britain, Denmark and Sweden — that have prospered. The two Nordic nations have voted by handsome majorities to keep their currencies. In both countries, political leaders warned that a No vote would lead to a downturn; and in both countries, the Nowas in fact followed by a surge in the stock exchange, a fall in inflation and a drop in long-term interest rates. In Britain, public opinion is granite hard for sterling, to the extent that no serious politician proposes joining the EU currency, and the lobby group set up to campaign for it has folded. Meanwhile, opinion within the euro zone has shifted. In France and Germany, majorities say they would rather have kept their old money. In Italy, some shops have started to accept lire again, to the delight of their customers. It may well turn out that membership of the euro has peaked at 13 with Slovenia’s accession. The scenic Alpine state, which joined the euro at midnight, is the goody-goody of the new intake, keen to adopt every harmonising measure. Perhaps its euro-enthusiasm owes something to the fact that, uniquely among the ex-Communist entrants, it has been run continuously by the old regime. Not that Slovenia’s rulers are Marxists these days, of course; indeed, they never really were. Rather, they are managerialists, supreme technocrats who have taken naturally to the Brussels system. Supporters of the currency are clutching at the news of Slovenia’s membership, but there is a hollow and perfunctory tone to their jollity. Looking back, their mistake was to rely on mood and symbolism to sell the new currency. Unable to argue convincingly that the euro would make people better off – as, indeed, it has not, bringing slower growth and higher inflation to most participants – they instead concentrated on claiming that monetary union was inevitable. At first, their tactic worked. No one likes to be on the wrong side of history and, faced with a choice between progress or backwardness, most people swallowed their doubts about the enterprise. But remove the sense of inevitability and the entire construct collapses. The optics of the Danish and Swedish referendums were especially telling in this regard. In both countries, the Yes campaigns were largely run by middle-aged, middle-class men, while the Nosides were made up of pretty girls in tight T-shirts. Suddenly, it seems only a matter of time before states start withdrawing. How funny to look back at the predictions of the Heseltines and Pattens and Kinnocks. Had these men been City forecasters, they would all now be out of a job. But, for some reason, we continue to invite them to pontificate on the BBC, to decorate and defer to them. Odd, really.”

One size does not fit all, and locking a continent as large and diverse as Europe into one interest rate policy was always madness. I feel sorry for tiny Slovenia, sold a duff currency, no doubt down to Brussels spin and the lubrication of financial aid.

The Eurocrats talk of convergence, but they forget that what can converge can also diverge, as is happening. It is true that no country is a perfect optimum currency area, but they have the political unity and strength to hold together and arenearer the OCA ideal than the Eurozone. Talk of Eurozone collapse is ever louder and from wider sources, such as Paul De Grauwe, a leading economist who made the pro-Euro case for the ECB.

The Business, 23rd April 2006: THE euro zone is heading for inevitable collapse because it cannot function without full political union, a senior economic adviser to the European Commission has warned. Paul De Grauwe, a leading economist whose work was used to make the case for European monetary union in the 1990s, says the signs point to a slow death for the euro project over as long as two decades. He has said the only future for Europe is to have a free trade zone – but he has questioned whether the European Union (EU) is needed now its member states have shown themselves hostile to further union. De Grauwe has shown The Business unpublished research he has written laying out in detail what he regards as the intrinsic link between political union and the success of currency union. The document, together with his comments last week in De Morgen, a Dutch newspaper, gives a bleak view of the euro zone’s prospects of maintaining a single currency without unified taxes or economic structures. His main observation is that inflation has not converged in the EU member states and that differences have been exacerbated over the years. But all are still under a 2% inflation target set by the European Central Bank. Italy, Spain, Portugal and The Netherlands, he argues, are now powerless to restore their competitiveness “without introducing outright deflation, and large increases in unemployment” – moves national governments are likely to avoid. “A political union is the logical end-point of a currency union. If political union fails to materialise, then in the long term the euro area cannot continue to exist,” he said in the interview. “Now that nobody appears to want that political union, you can begin to wonder whether monetary union was such a good idea,” he added. “Political unification has failed. But that is a big problem for the currency union. That is in danger.” The effects of this will take time, he said. “In the longer term, the monetary union will collapse … not next year, but on a time frame of 10 or 20 years. There is not a single monetary union which survived without political union. They have all collapsed.” “Sometimes I wonder: do we still need the European Union? I start to have doubts about that. It is sufficient that countries open up their economy. You don’t need to do that in the context of the European Union.” His comments will carry a powerful impact. De Grauwe’s work was cited by the architects of the euro zone at a time when it was argued membership would bring cheaper prices, higher economic growth and more employment. Since the euro zone countries locked their currencies in 1999, their average unemployment has been stuck at 9% and inflation rates across Europe remain disparate with no signs of convergence. De Grauwe stressed that his views are not shared by the Group of Economic Policy Analysis (GEPA) set up in February 2005 to advise José Manuel Barroso, president of the European Commission, who chairs the group’s quarterly meetings. One of GEPA’s points for discussion is the progress of the Lisbon Agenda – agreed six years ago – where member states proposed structural economic reforms aimed at making the euro zone the most competitive economy in the world by 2010. De Grauwe says this can now be discarded. “The Lisbon Process was a political fiction. It is best buried,” he says. The reality, he says, is that the European social model will not be abandoned. “We have built a system of social security that gives people too many incentives not to work. They can easily interrupt their career and leave the labour market early. For many people it is financially unattractive to work.” A spokesman for the European Commission said that De Grauwe’s remarks do not reflect its own and that he is employed only as an adviser – and speaks neither for the group nor the institution. “The Commission’s opinions on the issues raised are on the record and well known,” said a Commission spokesman. De Grauwe’s research paper concludes the euro project will flounder on a key flaw: that national politicians bear full political responsibility for unemployment, but that the tools to deal with it have been transferred to European institutions. “This will continue to make the euro zone a fragile regime. In the long run, however, there can be little doubt: without further steps towards political union the euro zone has little chance of survival.”

It’s time we burried the Euro and EU.



1. Joe - 2 February 2007

I notice nobody even in New Labour now thinks we should join. Ken Clarke and his ilk would have been better off keeping shtum over the issue in the nineties- the majority of the party was clearly right, as were the British people.
How odd that the consensus is hardening around what was once called Eurosceptic.
I suppose that’s some consolation for ten years of Blair.

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