The problem with the Euro

The problem with the Euro lies in the fact that, as much as people may talk about its benefits and advantages to its members, it is, and always has been, a political, rather than an economic idea. The Euro symbolizes the coming together of EU nations, and a further step towards a Federal European State. However, from a purely economic perspective, the single currency should never have been implemented: it has led to reckless borrowing, draconian austerity measures and been responsible for the huge surge in Euroskepticism currently flooding the continent. The financial crisis, and in particular the current situation in Greece would have doubtless been far less severe had the euro not been in place.   In short, it has led to far more harm than any god which has come out of it, and will go down in history as one of the greatest follies of our age.

The idea of the Euro stems from the Delors report in the late 80s, where monetary union was first proposed. The idea really kicked after Black Wednesday and the breakdown of the EMS, becoming a major policy issue for the EU. All member states were originally intended to join, although Denmark and the UK decided to opt-out, with a planned entry at a later date. In order to prevent recession, the Fiscal Stability accord was agreed upon, which limited a State’s debt to GDP ratio, the maximum permissible budget deficit and more. However these safeguards were, firstly, no where near strict enough and secondly , often simply ignored by member states. Had they been properly complied with, then Greece would never have been allowed entry. However, the political benefits of Monetary Union were given precedence over economic concerns, which would eventually lead to the disastrous situation we currently find ourselves in.

While the Euro has been rightly condemned for exacerbating the effects of the financial crisis, little attention has been given to the currency’s role in causing the Great Recession. Indeed, had it not been for Monetary Union, it is quite likely that the Crash of ’08 would not nearly have been so severe. The reason lies in part with Germany, who due to the costs of reunification, ensured that the interest rate set by the ECB remained low. However, this allowed banks, particularly those in Greece, Spain and Ireland, to fund enormous property development sites, at little to no cost. This would of course all come crashing down in September 2008, as liquidity dried up and the bubbles these countries had built their economies on burst in spectacular fashion.

When a country enters recession, it has various options available to it, in order to allow for an exit. The first is monetary policy, which involves lowering interest rates in order to reduce the cost of borrowing and thus increase investment. However, Euro member states do not control their interest rates, the ECB does, and so this option is not available to them. A currency devaluation involves reducing the value of the currency, in order to make exports cheaper and stimulate economic growth. However, individual Euro member states do not control the value of the single currency, and so this option is not available to them. Fiscal policy is the increase of government spending in order to lead to a similar increase in aggregate demand acroos the economy, thus causing growth. However, as per the terms of the Fiscal stability accord, Eurozone member states have strict targets which must be complied with or face heavy fines, and so this option is not available to them. Labour mobility, codeword for emigration, is a possibility, as people migrate from where it is poor to where it is prosperous. However, while this works in the United States, in Europe the situation is far different. There is no common language or culture, and often there is a history of animosity between the two nations. Irish people for example, would sooner move to Australia than to Germany. Wage flexibility is also an option, although remains difficult. Unlike  the United Sates, Unions are still quite powerful in Europe, while the ECJ grants strong worker protection, making wage cuts and layoffs more difficult for employers. Quantitative Easing (which will be fully explained in a later blog post) is a novel idea currently being tested, and it is still unclear what the long-term consequences f QE are. Therefore, the only option which remains open to many EU member states is austerity. Yanis Varoufakis, former finance minister of Greece, perhaps described this best as ‘austerity is like trying to extract milk from a sick cow by whipping it’

The great tragedy is that it did not have to be this way. Had EU leaders halted their plans for federalism and waited longer to introduce the Euro, until all member states were ready, then the EU would be a superpower to rival the US for world hegemony. However, by being over-eager and by jumping the gun, they have brought ruin and chaos upon their member states, and threatened the very foundations of the Union itself.