COMMENTARY
These views should be a warning to EU states considering €-zone membership
Autumn 2008
The Euro’s tenth anniversary could offer an occasion to look back and assess whether the common currency has been a success, or whether it should instead be seen as a politically-driven project that has made little economic sense. Instead, Joaquin Almunia has taken it as an opportunity to suggest that the European Union should acquire even more control over the economic policies of its member states. I must therefore disagree with the commissioner on both his main claims. The euro has not been a great triumph, and Economic and Monetary Union does not justify even greater intrusion by the EU into the democratic decisions of member states.
I also believe that the underlying tensions within the eurozone will one day lead to its break-up. And if Brussels does succeed in stripping the member states of their sovereign powers over economic policies, that day will come sooner rather than later.
To start with, you cannot measure the success of a currency simply by the fact that it has survived its first decade. There are plenty of world currencies in a dire state and yet they still exist. Also, the economic benefits of the euro were meant to outweigh its costs. But the long-term statistics on economic growth and price stability in the eurozone do not corroborate this political justification for the abolition of national currencies. Between 1999 and 2007, those western European economies that retained their own currencies grew by 30% in real terms, while the euro area grew by 23%. At the same time, eurozone inflation rates differed widely. In Germany, consumer prices grew cumulatively by 13% between 1999 and 2007, while in Ireland retail price inflation amounted to 35%.
The introduction of any common currency will clearly entail benefits that encourage growth, such as savings in transaction costs and other costs that slow down growth. The latter include balance of payments rigidities as problems in national accounts can no longer be corrected by exchange-rate adjustments. It should not be surprising, therefore, that the EU bureaucracy wants more power over national economic policies on the pretext of smoothing out trade imbalances between eurozone states. After all, economic theory implies that when a monetary union is created somewhere that is not an “optimum currency area”, the resulting setbacks can only be offset by a common fiscal policy.
Joaquin Almunia’s call, however, for more coordination and surveillance of “economic policies in a broader sense” would only deepen the democratic deficit already built into the Union. Member states today take half of their legislation from the EU, so if “economic policy in a broader sense” were dictated by Brussels too, why bother holding national elections at all? Economic policy is a political issue par excellence and as such it must remain with the member states.
Commissioner Almunia also believes that the euro provides a platform to manage challenges such as ageing populations or increased demand for raw materials. This is wrong. These things must be coped with whether a country has adopted the euro or not. He also put forward the truly monstrous idea that the EU should drive the economic policies of individual member states in order to manage “unit labour costs” and “current account imbalances”. In a way, this is understandable. With market-based exchange rates no longer available to help restore balance, the bureaucrats have to invent artificial regulatory measures to compensate. But market forces can only be replaced with socialist regulation and central planning at a very high price!
The euro-federalists managed to add economic, employment and social policies onto the list of powers that the Lisbon treaty would grant the EU. Fortunately, the treaty was defeated in Ireland, so neither the Irish nor the rest of us will have these policies dictated from Brussels. Instead of calling for new economic powers, Almunia should have acknowledged that the euro causes new problems which cannot be tackled without drastic new regulations. For members of the EU who are still thinking about joining the euro, this contribution by the commissioner should serve as a warning. It is not sensible to jettison your national currency and join an Economic and Monetary Union that is bent on depriving your country of the remaining sovereign powers that are still subject to democratic scrutiny.