"A Leap Of Faith
By EURSOC Two
10 June, 2005
A Tuscan supermarket has started accepting lira again. A majority of Germans want their D-Mark back. Dutch complaints that the introduction of the single currency sent prices soaring contributed to that nation's overwhelming rejection of the European constitution.
Look to those in power for less anecdotal evidence: A member of the Italian government has joined the chorus of those calling for a return to the lira. Germany economists held a shady meeting to discuss what would happen if a country wanted to quit the eurozone. Eurocrats have dismissed any rumours of trouble for the single currency as "absurd," closing ranks in a fashion that makes unhappy voters even more uneasy.
Is the European single currency doomed, then? Anatole Kaletsky has the science on how the management of the single currency has contributed to economic stagnation across the Eurozone. Furthermore, he claims that the single currency not only stifles markets but stifles democracy.
Both sceptics and Eurofanatics complain that the single currency is failing Europeans because it forces monetary union on nations without political union. Sceptics argue that if the currency could not have worked in the first place because of the diversity of needs throughout the Eurozone: Eurofanatics insist that political union would correct such failings. Indeed, many supporters of the currency hoped that its introduction would speed up political union. Such was the haste to get the project in motion, some nations were admitted to the Euroclub with decidedly dodgy accounts books - which are only now beginning to damage the single currency project.
Here's Kaletsky,
"The euro is the essential cause of Europe’s “democratic deficit” because it prevents different countries adopting the variety of social and business models that voters demand. A currency is to national economic management what a border is to political sovereignty: with floating currencies each country can choose its own style of economic and social organisation; with fixed currencies they can’t.
"If France or Italy wants a generous social safety net, it can keep its business costs down by devaluing its currency. Of course, devaluation may lower living standards for consumers, but if people want to pay this price to preserve their social traditions, that is what democracy is for. It is only when a country with high social costs loses control of its currency that the burden becomes intolerable, destroying jobs and decimating investment."
Having some control over its currency allows nations to "Make its (own) decisions about the balance between social protection, wages and currency strength."
One of the single currency's supposed strengths was safety in numbers. Britain's sterling was assailed by currency speculators on Black Wednesday in 1992 and the pound crashed out of Europe's Exchange Rate Mechanism (it seems that even independent currencies cannot be wholly controlled by their governments!) The euro, representing a dozen nations, would be a safer bet - or so the plan went.
Sadly, lack of flexibility can be as damaging as too much. The European Central Bank's seeming inability to take in the needs of individual nations in it stewardship of Eurozone interest rates has come under much criticism. The lack of accountability afforded to the bureaucrats who run the ECB reduces governments to little more than lobby groups pleading with ECB bosses for a break. Then nations like France and Germany tear up the budgetary rule book designed to safeguard the Euro (and go unpunished for it) and for a spell it looks like no-one is in charge of Eurozone economics.
Kaletsky believes introducing some form of accountability in Euro governance would concentrate minds, but even then bankers would need to balance the demands of different nations (and, like the ECB head, Jean-Claude Trichet, would be suspected of favouring their home countries).
Big nations like France and Germany could have their demands met, while smaller or less powerful partners might languish - and lose faith in the system.
And faith is what the whole problem boils down to. The euro has no democratic safeguards, and it and its governors must be taken on faith to bring benefits to Europeans. Once that faith begins to ebb away, the entire project begins to look shaky."
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