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22-12-2010, 11:38 AM
History of European integration explains why single currency is in current troubled state.
By Michael Goldfarb - GlobalPost
Published: December 16, 2010 06:01 ET in European Union
Editor's note: European leaders meeting in Brussels today agreed to create a permanent support fund for the euro, a first step — they hope — in calming market jitters over the plight of Europe's single currency.
LONDON, United Kingdom — This is the story of the euro and the economic crisis overwhelming the periphery of the eurozone — the main subject of a European Union summit meeting today and tomorrow. Before you click away to a story with more sex appeal, answer two questions:
How many people were killed in the wars that convulsed Europe between 1914 and 1945?
Between 1871 and 1945 France and Germany went to war three times, how many times have they gone to war since?
You are thinking about the answer to the first, but know the answer to the second: None. Zero. Zip. The story of the euro and its current crisis begins with that fact.
The idea of what is today the European Union can be traced to those 70 years of war and uneasy peace between Germany and France. Out of the rubble of that era two visionary politicians, Frenchman Jean Monnet and German Konrad Adenauer — in 1950, just five years after Germany's occupation of France was ended — established the European Coal and Steel Community (ECSC) to make it easier for France to import German steel and coal.
The ECSC was a success and by the end of the 1950s the Common Market was created. Decade by decade, treaty by treaty, Europe's political leadership continued their countries' drive toward economic integration. By 1985, the Schengen agreement eliminated many border controls, allowing the free movement of goods around the EU. Europe's collective economies grew.
The logic of economic integration led inevitably to the creation of a single currency. The Maastricht Treaty, signed in 1992, set the EU on the path toward the euro, launched in 1999 and used today by 16 of the EU's 27 members.
The logic for having a single currency may have been impeccable, but implementing it meant putting the idea through that most illogical of processes — politics. Politics is about appealing to emotion and the call of national identity is about as emotional as it gets.
In order to avoid running into the raw emotion connected to the EU's economic integration, much of the process was delegated to the European Commission, the EU's administrative arm in Brussels. Staffed by technocrats who speak and write a language unknown to ordinary folk, the process by which the euro was created was opaque and to some minds not entirely democratic.
For some nations, such as Britain, giving up the national currency was an identity crisis too far. Led by the right wing of the Conservative Party, opposition to joining the euro is visceral and deep seated in the U.K., and no British prime minister, Conservative or Labour, has even attempted to argue for membership in the single currency.
France and Germany were willing to cede their national currencies, but not their authority. Politicians like to control tax rates. They like to set budgets. So these functions were reserved for each government's politicians to oversee.
For its first decade the euro worked well. It quickly established itself as a reserve currency. It was instrumental in helping the entire European Union grow economically. Today the EU accounts for between 27 percent and 28 percent of world GDP — a larger share than either the U.S. or China.
But now there is a crisis. The onset of the global economic downturn caught over-leveraged economies in Europe with their pants down, especially those that, like America's economy, were heavily dependent on a never-ending property boom to maintain prosperity: Ireland, Greece, Portugal and Spain. Riots erupted again in Greece on Wednesday, thousands of young Irish people are re-enacting the great emigration of earlier generations, and Moody's investment service warned it is reviewing Spain's economy with an eye to downgrading its bond rating.
Current economic conditions have exposed the crack in the EU's foundation. A single currency always implied greater political union and that has never happened. There is no federal European government, and so there is no way for the EU to set a central tax policy or budget. Each nation inside the euro is sovereign with its own political dynamics. It is an irony that a politically created project has no overall political framework.
Now the smaller nations on Europe's periphery are in deep trouble, and they are having to raise money to pay off debts. The summit today and Friday is supposed to come up with a coordinated solution, but that won't be easy.
Germany carries a bigger stick when it comes to solving this crisis, not just because its economy is booming, but for historic reasons, according to Ian Stannard, currency analyst for BNP Paribas bank.
"The strength of the euro is inherited from the deutschmark," Stannard said. "The Bundesbank gave credibility to the European Central Bank."
One solution suggested for helping raise money to bail out the weaker economies is for the central bank to sell Europe-wide bonds. But the sale of euro-bonds is a no-no for the German government. German Finance Minister Wolfgang Schauble told German television earlier this week, “As long as we don’t have a common budgetary policy — and that was a decision made when setting up the euro — then we need to have different interest rates†payable on government bonds, Schaeuble said. “Because that’s the only way to bring member states round to sound policy. That can’t be abandoned.â€
In other words, Ireland, Portugal and Greece can raise money by selling their own bonds, and if the interest they have to pay on them is murderous, tough. Germany's economic strength and probity is not going to underwrite Europe-wide bond issues.
This doesn't mean Europe's leaders won't come up with some way of addressing the crisis, if not solving it, said Stannard. "The EU has always been managed by a series of deals being brokered."
The solution being discussed at this week's summit involves rewriting a clause of the recently ratified Lisbon Treaty: “The member states whose currency is the euro may establish a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality.â€
That is pure European technocrat language. I think what it means is that bailouts will be decided on a case-by-case basis. Whether that keeps the bond markets at bay is open to question.
Over in Britain, there is a self-satisfied sense of "I told you so." Yesterday at Prime Minister's Question Time, David Cameron was asked by Mark Reckless, a member of his own Conservative Party, "The BBC reports that the German Finance Minister wants to set an interest rate to punish Ireland. Will the prime minister confirm that this country wants to help Ireland?"
The prime minister replied: "My right honorable friend the Chancellor of the Exchequer will be setting out the details of the loan on Second Reading of the Bill today, but I think that it is worth standing back and asking ourselves, 'Why is it that we are able to make a loan to Ireland? Why is it that people are asking us to do that?' It is because Britain’s economy is out of the danger zone and recovering." The reason for that, he implied was because Britain was in charge of its own economic policy.
Despite the more alarmist analyses that have been published, Stannard does not think the euro is in danger of collapsing. "The euro is going to continue. The political will is very strong to keep it going," he said. "There are still countries queuing up to join the euro."
And if you wonder why the political will is still there to maintain the single currency now is the time to answer the questions at the top. No one knows precisely but a good estimate is that about 70 million people died in World Wars I and II. No one has died in a European war since the euro went into circulation.
By Michael Goldfarb - GlobalPost
Published: December 16, 2010 06:01 ET in European Union
Editor's note: European leaders meeting in Brussels today agreed to create a permanent support fund for the euro, a first step — they hope — in calming market jitters over the plight of Europe's single currency.
LONDON, United Kingdom — This is the story of the euro and the economic crisis overwhelming the periphery of the eurozone — the main subject of a European Union summit meeting today and tomorrow. Before you click away to a story with more sex appeal, answer two questions:
How many people were killed in the wars that convulsed Europe between 1914 and 1945?
Between 1871 and 1945 France and Germany went to war three times, how many times have they gone to war since?
You are thinking about the answer to the first, but know the answer to the second: None. Zero. Zip. The story of the euro and its current crisis begins with that fact.
The idea of what is today the European Union can be traced to those 70 years of war and uneasy peace between Germany and France. Out of the rubble of that era two visionary politicians, Frenchman Jean Monnet and German Konrad Adenauer — in 1950, just five years after Germany's occupation of France was ended — established the European Coal and Steel Community (ECSC) to make it easier for France to import German steel and coal.
The ECSC was a success and by the end of the 1950s the Common Market was created. Decade by decade, treaty by treaty, Europe's political leadership continued their countries' drive toward economic integration. By 1985, the Schengen agreement eliminated many border controls, allowing the free movement of goods around the EU. Europe's collective economies grew.
The logic of economic integration led inevitably to the creation of a single currency. The Maastricht Treaty, signed in 1992, set the EU on the path toward the euro, launched in 1999 and used today by 16 of the EU's 27 members.
The logic for having a single currency may have been impeccable, but implementing it meant putting the idea through that most illogical of processes — politics. Politics is about appealing to emotion and the call of national identity is about as emotional as it gets.
In order to avoid running into the raw emotion connected to the EU's economic integration, much of the process was delegated to the European Commission, the EU's administrative arm in Brussels. Staffed by technocrats who speak and write a language unknown to ordinary folk, the process by which the euro was created was opaque and to some minds not entirely democratic.
For some nations, such as Britain, giving up the national currency was an identity crisis too far. Led by the right wing of the Conservative Party, opposition to joining the euro is visceral and deep seated in the U.K., and no British prime minister, Conservative or Labour, has even attempted to argue for membership in the single currency.
France and Germany were willing to cede their national currencies, but not their authority. Politicians like to control tax rates. They like to set budgets. So these functions were reserved for each government's politicians to oversee.
For its first decade the euro worked well. It quickly established itself as a reserve currency. It was instrumental in helping the entire European Union grow economically. Today the EU accounts for between 27 percent and 28 percent of world GDP — a larger share than either the U.S. or China.
But now there is a crisis. The onset of the global economic downturn caught over-leveraged economies in Europe with their pants down, especially those that, like America's economy, were heavily dependent on a never-ending property boom to maintain prosperity: Ireland, Greece, Portugal and Spain. Riots erupted again in Greece on Wednesday, thousands of young Irish people are re-enacting the great emigration of earlier generations, and Moody's investment service warned it is reviewing Spain's economy with an eye to downgrading its bond rating.
Current economic conditions have exposed the crack in the EU's foundation. A single currency always implied greater political union and that has never happened. There is no federal European government, and so there is no way for the EU to set a central tax policy or budget. Each nation inside the euro is sovereign with its own political dynamics. It is an irony that a politically created project has no overall political framework.
Now the smaller nations on Europe's periphery are in deep trouble, and they are having to raise money to pay off debts. The summit today and Friday is supposed to come up with a coordinated solution, but that won't be easy.
Germany carries a bigger stick when it comes to solving this crisis, not just because its economy is booming, but for historic reasons, according to Ian Stannard, currency analyst for BNP Paribas bank.
"The strength of the euro is inherited from the deutschmark," Stannard said. "The Bundesbank gave credibility to the European Central Bank."
One solution suggested for helping raise money to bail out the weaker economies is for the central bank to sell Europe-wide bonds. But the sale of euro-bonds is a no-no for the German government. German Finance Minister Wolfgang Schauble told German television earlier this week, “As long as we don’t have a common budgetary policy — and that was a decision made when setting up the euro — then we need to have different interest rates†payable on government bonds, Schaeuble said. “Because that’s the only way to bring member states round to sound policy. That can’t be abandoned.â€
In other words, Ireland, Portugal and Greece can raise money by selling their own bonds, and if the interest they have to pay on them is murderous, tough. Germany's economic strength and probity is not going to underwrite Europe-wide bond issues.
This doesn't mean Europe's leaders won't come up with some way of addressing the crisis, if not solving it, said Stannard. "The EU has always been managed by a series of deals being brokered."
The solution being discussed at this week's summit involves rewriting a clause of the recently ratified Lisbon Treaty: “The member states whose currency is the euro may establish a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality.â€
That is pure European technocrat language. I think what it means is that bailouts will be decided on a case-by-case basis. Whether that keeps the bond markets at bay is open to question.
Over in Britain, there is a self-satisfied sense of "I told you so." Yesterday at Prime Minister's Question Time, David Cameron was asked by Mark Reckless, a member of his own Conservative Party, "The BBC reports that the German Finance Minister wants to set an interest rate to punish Ireland. Will the prime minister confirm that this country wants to help Ireland?"
The prime minister replied: "My right honorable friend the Chancellor of the Exchequer will be setting out the details of the loan on Second Reading of the Bill today, but I think that it is worth standing back and asking ourselves, 'Why is it that we are able to make a loan to Ireland? Why is it that people are asking us to do that?' It is because Britain’s economy is out of the danger zone and recovering." The reason for that, he implied was because Britain was in charge of its own economic policy.
Despite the more alarmist analyses that have been published, Stannard does not think the euro is in danger of collapsing. "The euro is going to continue. The political will is very strong to keep it going," he said. "There are still countries queuing up to join the euro."
And if you wonder why the political will is still there to maintain the single currency now is the time to answer the questions at the top. No one knows precisely but a good estimate is that about 70 million people died in World Wars I and II. No one has died in a European war since the euro went into circulation.