John Laughland: Why the Euro Will Fail
Throughout the history of European integration, its supporters have often used transport metaphors to sell their project.
In the 1960s, Europe was a bicycle which had to keep moving forward for fear of falling over. In the 1980s, Europe was a boat or a train which laggards were in danger of missing.
These metaphors were banal and nonsensical until 1999, when one of them proved to be prophetic. In the euphoria generated by the launch of the single currency, the euro, on Jan.1 of that year, a European official announced that Europe was now “on a freeway which has no exit.”
What he meant, of course, was that Europe wasn’t going back to national currencies. However, he hadn’t thought his metaphor all the way through. A freeway without an exit can lead to only one thing: a very serious car wreck. That is precisely the outcome that horrified European leaders are now being forced to contemplate.
German Chancellor Angela Merkel recently caused panic in the financial markets when she tried to shore up support for her huge bailout plan by warning that “the euro is in danger.”
Other European leaders, especially in France, rushed to correct the damage caused by such German tactlessness, insisting that, on the contrary, all was well. However, the idea that the euro’s days are numbered is becoming increasingly widespread in both the financial markets and the press.
The immediate cause of the crisis in the euro zone has been Greece, which has been teetering on the verge of default for months because it cannot even afford to reschedule its gigantic state debt.
One thinks of Greece as a country full of village squares where elderly men while away the day in the shade. This cliché does indeed reflect the reality of the country where people retire in their 50s after having been paid 14 months’ salary a year.
Greece has one million public servants for a population of 11 million citizens — the same number as in Britain, whose population is nearly six times greater. No wonder they can’t pay their bills.
However, the politics is worse than the economics.
The crisis has poisoned relations between Germany and Greece so badly that German tourists have literally canceled their holidays in Greece out of fear of the hostility to which they knew they would be exposed. The Germans, meanwhile, strongly resent having to tighten their own belts while the Greeks open another bottle of ouzo (a popular drink in Greece).
The multibillion euro bailout has also led to severe ructions between Germany and France, because many in Germany say, albeit under their breath, that the bailout is intended mainly to help French banks, who indeed hold the lion’s share of Greece’s debt.
Meanwhile, the French Finance Minister has complained that the euro is so structured that it necessarily benefits the German economy to the detriment of the other euro states, the implication of which is that the Greek crisis will be reproduced somewhere else soon.
The very thing which was supposed to bring the nations of Europe closer to one another — the euro — is in fact turning out to be a cause of division.
It is these political factors which will decide the euro’s fate. The strings of zeros being handed out to keep the euro zone together may spell economic disaster.
Certainly, large elements of the bailout (especially the May 10 decision by the European Central Bank to start buying government debt, i.e., to monetize it) will almost definitely lead to serious inflation.
On the other hand, what Europe is doing to save the euro is no different from what the United States has done to shore up the American banking system and the economy in general. Perhaps European leaders calculate that their currency will be no weaker than the other frail currencies all over the world.
The decisive factor isn’t the market, but instead the political incoherence of the euro project in the first place – an incoherence which, in my view, dooms the project to eventual collapse.
The euro is built on so many contradictions that it is difficult to keep track of them. It was supposed to de-politicize monetary policy by placing it in the hands of an independent central bank whose only goal was to drive down inflation. Yet it is the very centerpiece and foundation of the most ambitious political project since the creation of the Holy Roman Empire in the year 800, the project of uniting the whole of Europe under a single political and economic regime.
The euro was supposed to be based on strict rules of sound budgetary housekeeping, inspired by the German model. These rules have been constantly violated, including by the Germans who are now pontificating about how important it is to respect them.
The euro was supposed to foster economic growth and stability. It now threatens to push several European economies into a hopeless spiral of deflation and political turbulence.
The euro zone seriously pretends that all its member states are working to reduce their total state debt. In fact, all these states run annual budget deficits, i.e., they spend every year more than they earn.
The Greeks are accused of cooking the books to make it appear that they qualified for membership 10 years ago; yet the same is almost certainly true of Belgium and Italy, founder member states of the European Community whose exclusion from the euro zone is politically unthinkable.
There is a less polite term for these contradictions, and it is “lies.” Perhaps the biggest lie of all is that the euro is a true monetary union.
The European Central Bank fulfills neither of the two key functions generally associated with central banks. It is neither an issuer of currency nor a lender of last resort. Both these functions continue to be carried out by the national central banks, all of which still exist but which act (and decide) together how to run their common monetary policy.
The bank notes reflect this highly de-centralized structure, since each of them bears a secret code, in the form of a letter in the serial number, which indicates its national origin. In technical terms, it would therefore be as easy for the European Monetary Union to break up as it was for Argentina to abandon its dollar peg in 2002.
Even this lie, however, pales in significance against the sheer unreality of the European project as a whole. This project is based on the idea that the whole of politics can be handed over to administration by technocrats, and on the associated idea that nation states can and should be subsumed into an apolitical overarching European order.
Precisely what the Greek crisis has shown is that the national principle cannot be consigned to the dustbin of history. Indeed, to judge by the German and Greek national presses, nation-statehood, and even straightforward nationalism, are alive and well in the euro zone.
It is no exaggeration to say that the Germans think the Greeks are a bunch of lazy thieves and the Greeks think the Germans are a bunch of arrogant Nazis.
To be sure, any nation-state has tensions between its different regions but, when the chips are down, nation states usually pull together. By contrast, when the chips are down in an artificial structure like the euro zone, its component parts generally pull apart.
There is no such thing as an apolitical monetary policy.
On the contrary, just as huge swathes of modern history can be explained in terms of monetary decisions — the history of the French revolution is closely linked to the history of the state debt and the currency, while the history of the 20th century is closely linked to Roosevelt’s decision to forbid the private holding of gold in 1933 — so the fate of the euro will depend on the political see-saw of power between France and Germany.
In 1989, the original impetus behind monetary union was to contain a reunited Germany in an overarching European structure — abandoning the deutsche mark was the price the Federal Republic paid for annexing East Germany.
The newly powerful Germany responded in 1992 by trying to impose its model on the other future euro member states, and for a long time it looked as if it was going to succeed.
A series of “convergence criteria” were laid down and pundits (including me) spent years discussing which few select countries would fulfill them. But the powerful Helmut Kohl left office in 1998 and the decision was taken in 1999 to throw the rules out of the window and to admit all the states which wanted to join. The Greek crisis of 2010 is nothing but a case of chickens coming home to roost.
So the future of the euro lies in German hands.
However, the speculation so far has concentrated exclusively on the possibility that Greece or other Mediterranean states might abandon the euro and devalue. Little attention has focused on another possible scenario, namely that Germany might be the first to go, leaving behind an empty shell.
With popular opinion in Germany riding high against the euro, and with several of the key (German) principles for sound monetary policy having been grossly violated, there is now a definite political and perhaps even a legal case for leaving.
Given that any serious fear of German militarism has long since disappeared from Europe — however much Europeans may resent German economic arrogance — the original raison d’être of the euro itself, as of the European Union as a whole, has largely vanished.
Under such circumstances, it seems absurd to continue with a project concocted in totally different geopolitical circumstances and which, like everything else about the euro, no longer corresponds to any reality whatever.
John Laughland is Director of Studies at the Institute of Democracy and Cooperation in Paris.
Throughout the history of European integration, its supporters have often used transport metaphors to sell their project.
In the 1960s, Europe was a bicycle which had to keep moving forward for fear of falling over. In the 1980s, Europe was a boat or a train which laggards were in danger of missing.
These metaphors were banal and nonsensical until 1999, when one of them proved to be prophetic. In the euphoria generated by the launch of the single currency, the euro, on Jan.1 of that year, a European official announced that Europe was now “on a freeway which has no exit.”
What he meant, of course, was that Europe wasn’t going back to national currencies. However, he hadn’t thought his metaphor all the way through. A freeway without an exit can lead to only one thing: a very serious car wreck. That is precisely the outcome that horrified European leaders are now being forced to contemplate.German Chancellor Angela Merkel recently caused panic in the financial markets when she tried to shore up support for her huge bailout plan by warning that “the euro is in danger.”
Other European leaders, especially in France, rushed to correct the damage caused by such German tactlessness, insisting that, on the contrary, all was well. However, the idea that the euro’s days are numbered is becoming increasingly widespread in both the financial markets and the press.
The immediate cause of the crisis in the euro zone has been Greece, which has been teetering on the verge of default for months because it cannot even afford to reschedule its gigantic state debt.
One thinks of Greece as a country full of village squares where elderly men while away the day in the shade. This cliché does indeed reflect the reality of the country where people retire in their 50s after having been paid 14 months’ salary a year.
Greece has one million public servants for a population of 11 million citizens — the same number as in Britain, whose population is nearly six times greater. No wonder they can’t pay their bills.
However, the politics is worse than the economics.
The crisis has poisoned relations between Germany and Greece so badly that German tourists have literally canceled their holidays in Greece out of fear of the hostility to which they knew they would be exposed. The Germans, meanwhile, strongly resent having to tighten their own belts while the Greeks open another bottle of ouzo (a popular drink in Greece).
The multibillion euro bailout has also led to severe ructions between Germany and France, because many in Germany say, albeit under their breath, that the bailout is intended mainly to help French banks, who indeed hold the lion’s share of Greece’s debt.
Meanwhile, the French Finance Minister has complained that the euro is so structured that it necessarily benefits the German economy to the detriment of the other euro states, the implication of which is that the Greek crisis will be reproduced somewhere else soon.
The very thing which was supposed to bring the nations of Europe closer to one another — the euro — is in fact turning out to be a cause of division.
It is these political factors which will decide the euro’s fate. The strings of zeros being handed out to keep the euro zone together may spell economic disaster.
Certainly, large elements of the bailout (especially the May 10 decision by the European Central Bank to start buying government debt, i.e., to monetize it) will almost definitely lead to serious inflation.
On the other hand, what Europe is doing to save the euro is no different from what the United States has done to shore up the American banking system and the economy in general. Perhaps European leaders calculate that their currency will be no weaker than the other frail currencies all over the world.
The decisive factor isn’t the market, but instead the political incoherence of the euro project in the first place – an incoherence which, in my view, dooms the project to eventual collapse.
The euro is built on so many contradictions that it is difficult to keep track of them. It was supposed to de-politicize monetary policy by placing it in the hands of an independent central bank whose only goal was to drive down inflation. Yet it is the very centerpiece and foundation of the most ambitious political project since the creation of the Holy Roman Empire in the year 800, the project of uniting the whole of Europe under a single political and economic regime.
The euro was supposed to be based on strict rules of sound budgetary housekeeping, inspired by the German model. These rules have been constantly violated, including by the Germans who are now pontificating about how important it is to respect them.
The euro was supposed to foster economic growth and stability. It now threatens to push several European economies into a hopeless spiral of deflation and political turbulence.
The euro zone seriously pretends that all its member states are working to reduce their total state debt. In fact, all these states run annual budget deficits, i.e., they spend every year more than they earn.
The Greeks are accused of cooking the books to make it appear that they qualified for membership 10 years ago; yet the same is almost certainly true of Belgium and Italy, founder member states of the European Community whose exclusion from the euro zone is politically unthinkable.
There is a less polite term for these contradictions, and it is “lies.” Perhaps the biggest lie of all is that the euro is a true monetary union.The European Central Bank fulfills neither of the two key functions generally associated with central banks. It is neither an issuer of currency nor a lender of last resort. Both these functions continue to be carried out by the national central banks, all of which still exist but which act (and decide) together how to run their common monetary policy.
The bank notes reflect this highly de-centralized structure, since each of them bears a secret code, in the form of a letter in the serial number, which indicates its national origin. In technical terms, it would therefore be as easy for the European Monetary Union to break up as it was for Argentina to abandon its dollar peg in 2002.
Even this lie, however, pales in significance against the sheer unreality of the European project as a whole. This project is based on the idea that the whole of politics can be handed over to administration by technocrats, and on the associated idea that nation states can and should be subsumed into an apolitical overarching European order.
Precisely what the Greek crisis has shown is that the national principle cannot be consigned to the dustbin of history. Indeed, to judge by the German and Greek national presses, nation-statehood, and even straightforward nationalism, are alive and well in the euro zone.
It is no exaggeration to say that the Germans think the Greeks are a bunch of lazy thieves and the Greeks think the Germans are a bunch of arrogant Nazis.
To be sure, any nation-state has tensions between its different regions but, when the chips are down, nation states usually pull together. By contrast, when the chips are down in an artificial structure like the euro zone, its component parts generally pull apart.
There is no such thing as an apolitical monetary policy.
On the contrary, just as huge swathes of modern history can be explained in terms of monetary decisions — the history of the French revolution is closely linked to the history of the state debt and the currency, while the history of the 20th century is closely linked to Roosevelt’s decision to forbid the private holding of gold in 1933 — so the fate of the euro will depend on the political see-saw of power between France and Germany.
In 1989, the original impetus behind monetary union was to contain a reunited Germany in an overarching European structure — abandoning the deutsche mark was the price the Federal Republic paid for annexing East Germany.
The newly powerful Germany responded in 1992 by trying to impose its model on the other future euro member states, and for a long time it looked as if it was going to succeed.
A series of “convergence criteria” were laid down and pundits (including me) spent years discussing which few select countries would fulfill them. But the powerful Helmut Kohl left office in 1998 and the decision was taken in 1999 to throw the rules out of the window and to admit all the states which wanted to join. The Greek crisis of 2010 is nothing but a case of chickens coming home to roost.
So the future of the euro lies in German hands.
However, the speculation so far has concentrated exclusively on the possibility that Greece or other Mediterranean states might abandon the euro and devalue. Little attention has focused on another possible scenario, namely that Germany might be the first to go, leaving behind an empty shell.
With popular opinion in Germany riding high against the euro, and with several of the key (German) principles for sound monetary policy having been grossly violated, there is now a definite political and perhaps even a legal case for leaving.
Given that any serious fear of German militarism has long since disappeared from Europe — however much Europeans may resent German economic arrogance — the original raison d’être of the euro itself, as of the European Union as a whole, has largely vanished.
Under such circumstances, it seems absurd to continue with a project concocted in totally different geopolitical circumstances and which, like everything else about the euro, no longer corresponds to any reality whatever.
John Laughland is Director of Studies at the Institute of Democracy and Cooperation in Paris.
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