Can Europe really reject the euro?
By
Simon Wilson Dec 12, 2005
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Why all this talk about Europe? It's all due to a 'perfect storm' of economic recession, political turmoil in Europe in the wake of the Constitution fiasco, and popular resentment of the euro and what it represents. This means the idea that the single currency might fail can no longer be dismissed as a eurosceptic fantasy. Indeed, in the wake of the French and Dutch 'no' votes at the start of June, it was an Italian minister, Roberto Maroni, who became the first governing-party politician publicly to back ditching the euro and bringing back the lira. Maroni contrasted Britain's success outside the euro with Italy's recession and high unemployment. His rightwing Northern League party currently a member of Italy's ruling coalition has promised to fight next year's election on a 'bring back the lira' platform.
Should such talk be taken seriously?
Maroni isn't a particularly influential politician, but he is not alone in wanting to dump the euro. In Europe's biggest country, Germany, which did not offer its people a chance to vote on the Constitution, opinion polls show 56% of people want to return to the mark. And at the same time that the French and Dutch were voting 'no', news magazine Stern published an authoritative account of a recent meeting at which German finance minister Hans Eichel and Axel Weber, president of the Bundesbank, were briefed by outside economists on break-up scenarios for the euro. German officials deny making contingency plans, but it is certain that some kind of seminar took place. Finally, and most significantly, financial markets have started speculating for the first time that the euro may collapse: they now forecast different variable long-term interest rates on government debt in different eurozone countries.
Why do so many people hate the euro?
Many of the countries that joined the euro have since suffered economic stagnation and rising unemployment. Look at the biggest eurozone economies; France and Germany are struggling, while Italy has seen full-blown recession. The chief problem is that the one-size-fits-all monetary straitjacket the euro imposes together with the stability and growth pact are not able to take account of individual countries' economic difficulties. Otmar Issing, chief economist of the European Central Bank (ECB), has admitted that even back in 1999, when the euro was created, it was clear the 12 eurozone countries 'did not form anything close' to an 'optimal currency area' ie, a relatively uniform zone in which a single interest rate can work for all. Time has proved him right. Some national economies, such as Portugal's, have run too hot, with inflationary booms, while others, such as Germany's, have run much too cold, enduring near-deflationary stagnation.
But is it really the euro's fault?
The euro can't be blamed for all Europe's woes: the roots of its under-performance pre-date 1999. But the single currency is vulnerable to a collapse in public support because none of the 12 states that adopted it had a referendum first. It's potentially a symbol and target of wider discontent related to a deficit of democracy in the EU and alienation of its elites from its people.
How does a country leave the euro?
In theory, there isn't a process in place: European monetary union was supposed to be permanent and irrevocable. In fact, Jean-Claude Trichet, governor of the ECB, dismisses talk of the euro's possible break-up as 'complete nonsense' as unimaginable and 'absurd' as the idea of Florida adopting its own currency. Still, that doesn¹t mean it isn't possible. It might get messy any country leaving the euro would see a good deal of instability (and probably rocketing interest rates) but there are plenty of examples of 'permanent' currency unions breaking up (such as the Latin Monetary Union of 1865-1927, which brought together France, Belgium, Switzerland, Italy and later Greece). Moreover, international law is clear that a sovereign nation state never loses the power to issue its own currency.
How would it be done?
Joachim Fels, Morgan Stanley's chief European economist, was one of the experts at the controversial meeting in Germany. He argues the switch back to a national currency would be more straightforward than often supposed, because the national central banks are still fully operational, holding the bulk of each country's euro reserves and with systems in place to run national monetary policy from day one. Moreover, since euro bank notes can be traced back to the issuing national bank (by the letter before the serial number eg, an 'X' for the Bundesbank), a country could decide to use its own euro notes and coins as legal tender until the new national currency has been printed and minted. Fels thinks the possible instability ahead means investors should steer clear of European bonds.
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