EU's single-currency disaster

EURO TRAGEDY
 

A drama in nine acts

Ashoka Mody

Oxford University Press, 651 pages; $34.95
 

Anyone wanting to understand why the European Union’s single currency area — the Eurozone — has failed to bridge political divisions within the EU or disappointed many of the 19 EU countries that opted for the euro after its launch in 1999 – should read Ashoka Mody’s clearly written and meticulously referenced Euro Tragedy. Dr Mody’s account of the series of problems faced by Italy, a Eurozone member, indirectly throws light on why it recently became the first West European and G7 country to join China’s Belt and Road Initiative. 

By 1968, when the euro was proposed, West Europe’s post-war economic boom had passed into history. The idea of one currency across the EU appeared reasonable enough: It would cut international transaction costs for euro-countries. And despite strong popular opposition to the replacement of national currencies, of which citizens were proud, Chancellor Helmut Kohl, the architect of German reunification in 1990, pushed the euro through on the grounds that countries sharing a single currency would never go to war. He also assured German voters that they would never have to pay for bailing out inefficient euro-economies. 

Those favouring the euro had no idea where the common currency would take the Union. To its opponents, the very idea was economically unsound, because the mix of fixed exchange rates and central planning would never work. At no time were leaders of EU countries willing to surrender control over their own tax revenues, or their right to decide how much to spend at home. Rich countries like Germany refused to “rescue” unfortunate countries from economic hardship. Conflicts of interest over economic issues often triggered political conflicts. But “groupthink” resulted in any one opposing the Euro being branded chauvinist and anti-European. Every risk was downplayed by those favouring the euro. The result: The euro has driven deeper the rifts within the EU rather than strengthened unity. 

Most EU member-states have adopted the euro as their national currency. The European Central Bank is the single monetary authority with a single monetary policy for the whole euro area. Its primary aim is to maintain price stability. Although economic policy remains largely the responsibility of individual euro countries, national governments must coordinate their respective economic policies in order to achieve the common objectives of stability, growth and employment. 

From the outset, the main flaw of a single currency was that a country facing recession could not devalue to help its companies selling abroad or tackle unemployment. A euro-country-in-recession did not have a central bank to revise its interest rates to stimulate growth.

The interest rates set by the European Central Bank were too high for those of the ailing Italian economy; too low for Germany. There were no fiscal safeguards to tackle recessions or booms. 

Germany reformed its labour market and overcame the hardships caused by reunification. Its exports rose. In contrast, Italy was plagued by low productivity, high government spending and declining job opportunities. Its GDP per person has stagnated since the euro became the official currency in 1999. Rome and Brussels have often wrangled over budget targets. Admittedly, Italy’s low growth rates predated the euro. Even so, once Europe’s second-largest manufacturing hub, euro-Italy saw the competitive edge of its companies shrink. Its leaders were unable to intervene by devaluing the lira to make exports cheaper. 

As for Greece – which raised the spectre of “Grexit” barely two years ago -- euro membership allowed Athens to borrow heavily at low interest rates. But when problems arose, it could not devalue its drachma to get out of trouble. The country’s Eurozone partners, along with the International Monetary Fund, simultaneously offered more low-interest loans and demanded steep cuts in public spending. The austerity pushed Greece into a deep recession, and over the past eight years, the economy has contracted by a quarter. 

Moreover, the EU’s lack of political legitimacy has undermined its institutions. For instance, to whom would an EU finance minister be accountable – to governments or to members of the European Parliament? This absence of accountability has been exploited by Europe’s far-right parties, raising question marks over the future of the Eurozone — and of the relevance of Brussels itself. 

The popularity of the elected European Parliament has also declined. Sixty-two per cent of voters cast their ballots in the parliament’s first election in 1979; a mere 43 per cent in 2014. East Europeans have engaged less with the European parliament than West European ones. A mere 13 per cent of Slovak voters cast their ballots in the 2014 parliamentary elections. 

That monetary union could depress growth, undermine the EU’s legitimacy and exacerbate inequality was known by “pro-Euro” leaders decades ago. But they ignored warnings that the euro could do little good and colluded to whitewash or conceal bad economic data. 

What does the future hold for the eurozone? No matter how inefficient, the monetary union cannot be undone. But there is little chance of making it work better. Dr Mody foresees the eurozone continuing to move from crisis to crisis, with perhaps the most indebted nations eventually opting out of the single currency.

The reviewer is a Founding Professor of the Centre for Peace and Conflict Resolution in New Delhi

Website: www.anitaindersingh.com