When a currency is trying to be all things to all people, it lives dangerously
The euro has reached its 20th anniversary without much fanfare. Across those nations that call it their currency, there remains debate on whether it has boosted prosperity, or been a straitjacket hindering the growth of the bloc’s more fragile economies. We are at the core of the issue that may threaten to be the euro’s undoing: when a currency is trying to be all things to all people, there is bound to be instability.
Arguably, it is wrong to look at the single currency as an end in itself; it is not and never has been.
It exists as a means to a political end. The economic project has always played second fiddle to the political imperative, yet the two are inextricably linked. For the euro to still be around in another 20 years, the only logical and rational next step must be to complete the project by creating a unified, balanced economic system, in which monetary policy and fiscal policy are aligned and applied in a homogeneous way across the entire eurozone.
A Herculean task
No one is under any illusion as to the scale of the task ahead. One only has to consider how difficult it has been for the UK to extricate itself from the European Union to understand how tortuous negotiations could be among the remaining 27 EU members as they seek to do the opposite; namely, complete the process of integration. Success depends on political will and the ability to carry national electorates. Nothing is ever simple when national interests rub against each other.
It is this weak foundation on which the euro has been built that gives us little cause for celebration on the single currency’s 20th anniversary.
If one had a more glass-half-full attitude, it could be said that the euro has become the second most-traded currency in the world behind the US dollar. For non-EU mercantile nations, the single currency makes it much more straightforward to trade goods and services with the 19 eurozone members.
While this is undoubtedly an advantage for both sides, the currency’s strength or weakness is also a function of internal economic conditions within the EU.
The German economy has such a strong centre of gravity that it has had a disproportionate pull on the euro, at the expense of other eurozone nations.
The euro is less strong than the deutschmark it replaced and this situation has given Germany an unfair competitive advantage, fuelling an export-driven economic boom. At the same time, the euro is stronger than some of the former currencies – the drachma, peseta and lira – used by southern eurozone states in the past and which, under normal circumstances, would have been likely to have depreciated given these countries’ weaker economies.
Such economies have been severely hamstrung by the strength of the euro relative to their own positions.
But, having given up their former national currencies, the normal safety valve which automatically regulates a country’s trade imbalances no longer exists.
The resulting debilitating effect of a long-term lack of competitiveness has led to relative economic decline and significant social problems, including mass unemployment, notably among the young.
Haves and have-nots
This, in turn, has had political consequences that are all too clear to see, with increasingly polarised views across the eurozone and the wider EU. As economic and political stresses have built, so the expectation is that the stronger northern states should effectively subsidise the weaker southern and eastern economies. That too has political consequences and creates tensions.
Nowhere was this more in evidence than during the Greek crisis, a well-documented stand-off which so nearly brought down the whole euro house of cards.
For Europe’s founding fathers, one can say with a certain amount of confidence that it was never their intention to deliberately create an asymmetric economic system – one that places monetary and fiscal policy in completely different orbits – and to leave it at that.
There would have been no sense in building an inherently permanently unstable system from the outset.
The question has been posed before: should political union have preceded monetary union?
It remains a moot point, but it’s a fruitless argument. Like it or not, here is where we are, and the fundamental political and ideological debates playing out across the bloc about the pace and depth of future integration will ultimately define whether the European project achieves the ambitions of its founders, or whether it eventually unravels and disintegrates.
Alastair Irvine is product specialist on the Jupiter Independent Funds team