The euro: Damaging from the start
I had the privilege of negotiating Britain’s opt-out from the European single currency project in 1991. My abiding memory is how clear it was that from the outset the euro had nothing to do with economics and was a political project with a dubious ration
This week will be a momentous one for Europe, with a string of crucial meetings, including the summit at which the British Prime Minister will table his renegotiation demands. We may be focused on our renegotiation, but it is Greece that will dominate the event. For some time it has looked as though the Greek drama must reach its denouement. But the Greeks have become highly skilled at managing to push back deadlines ever further.
Whether Greece leaves the euro or stays in, a decision surely cannot be delayed much longer. So what will this mean for the European Union? I had the privilege of negotiating Britain’s opt-out from the European single currency project in 1991. My abiding memory is how clear it was that from the outset the euro had nothing to do with economics and was a political project with a dubious rationale. Some representatives of other countries were openly sceptical, but their political masters were firmly in control.
The creation of the euro has been an error of historic dimensions and done great harm to the EU, which in its first 40 years had brought economic prosperity to the citizens of the Continent. In those years the less well-off countries benefited from the lowering of tariffs and the increase in internal trade. After the creation of the euro, however, economic growth slowed markedly. Poorer countries fared worse than the more prosperous countries, like Germany, which benefited from the new, weaker currency. The Greek crisis epitomises the complete mess that Europe has made of the single currency.
Greece should never have been admitted in the first place, though it was not the only country — Belgium and Italy were two others — that didn’t meet the strict criteria for membership. From the beginning, the rules put in place for the euro, relating to bailouts, monetary financing and deficit levels, have been ignored. Europe claims to be a rule-based organisation. But however else the Eurozone is run, it is not run strictly according to its own rules. The rhetoric of the participants in the Greek crisis knows no bounds. Prime Minister Alexis Tsipras accuses the International Monetary Fund (IMF) of “pillaging” his country and of “criminal responsibility”.
In turn, the governor of the Greek Central Bank warns of events that may “entirely transform the economic and political balances throughout the West”. No. 10 Downing Street warns that Britain faces an economic crisis if Greece defaults and leaves the euro. It is an astonishing achievement of the euro that a small country on the periphery, representing just about 2 per cent of Europe’s GDP, should be able to threaten such a catastrophe. The Greeks have made mistakes. Yet I have to confess to being more sympathetic to Greece than many observers.
The EU has also made mistakes and the crucial one was the failure to write off more of Greece’s debt with the first bailout in 2010.
Greece’s debt now is spilt milk. It will not and cannot be repaid. Even the IMF’s chief economist, Olivier Blanchard, has expressed his dismay at the unreality of the negotiations and called for further debt relief to be a central part of any settlement. Because of the absence of realistic debt write-off, Greece has had to undergo, to use the official euphemism, the most savage “internal devaluation”.
As a result, real GDP in Greece fell by 27 per cent; unemployment reached 28 per cent; wages fell 37 per cent; pensions were reduced by up to 48 per cent; and government employment fell 30 per cent. Even for fiscal conservatives like myself, these policies seem counterproductive. GDP has been falling so fast and the ratio of debt to the economy has risen so sharply (to 180 per cent of GDP), that it is ever more difficult for Greece to pay off its debt. Syriza’s rise to power highlights a deeper problem about the EU: the conflict between the purportedly inflexible, irreversible rules of the euro and national democracy.
When Tsipras says that Greece is a sovereign nation and that he has a democratic mandate, he is stating nothing less than a fact. But this conflict is one that could arise over other issues and with other countries. Britain is outside the Eurozone, but unless we can build firewalls and restrict the areas of European competence, we could find ourselves with similar conflicts between what voters want and Europe will permit. It is difficult to guess what will happen in the next few days. A fudge would be the worst of all worlds.
Rather, it looks increasingly likely that Greece will be forced to default. Brussels believes that the financial consequences of a Greek exit could be contained and that the Eurozone could be left stronger. One must hope they are right. Others talk of another Lehman Brothers crisis. What is clear is that in the next crisis, and there is bound to be one, the euro would be much less credible and no longer seen as unbreachable. If Greece leaves the euro, it is likely to involve capital controls, nationalisation of banks and the possible introduction of a parallel currency.
Some in Brussels talk of Greece having to leave the EU, too. I doubt that. But if it did happen, a Greek exit would be an unravelling of not just the euro but of the EU as well. The political consequences could be as chaotic as the economic. Tsipras talks of a “betrayal of the European idea”. Greece is not going to become a Russian vassal state but the consequences of this humiliation could be unpredictable.
The EU already faces serious dissatisfaction from public opinion throughout Europe. The discontent has been most pronounced in Britain, but it would be surprising if it did not grow in other countries. Even the EU is concerned and this week we will receive a report from the “five presidents” on the future of the Eurozone. The five presidents — not the Five Tenors — in case you have forgotten, are the presidents of the commission, the council, the euro group, the ECB and the president of the European Parliament.
Their report will concentrate on how to underpin the euro. Its recommendations are rumoured to include a European-wide minimum wage, and a common unemployment insurance system. Whatever the detail, however, there will certainly be a significant move from coordination to more control over national economic and budgetary policies.
Once again, the response of Europe to a crisis will be more Europe, more centralisation. This will only heighten the tensions between Brussels and national parliaments. The EU has never lacked pretensions, but has been less good at living up to them. Last week it was celebrating the 30th anniversary of what it calls “one of the greatest achievements of the EU” — the Schengen Agreement, which opened internal borders in the EU. Yet at the same time it remains paralysed over the refugee crisis. The EU also wants to be a global power but has shown itself over Ukraine to be a hopeless, incompetent geopolitical actor. In economics, too, its reach far exceeds it grasp. Europe needs to do much less and do it much better. Britain is extremely fortunate that it is not at the “heart of Europe”, but it still needs a real, robust renegotiation to make sure it is protected against Europe’s dangerous dreams and visions.
-The Telegraph Group Limited, London 2015
● Some in Brussels talk of Greece having to leave the EU, too. I doubt that. But if it did happen, a Greek exit would be an unravelling of not just the euro but of the EU as well. ● Once again, the response of Europe to a crisis will be more Europe, more centralisation. This will only heighten the tensions between Brussels and national parliaments.