The Euro at 10
Martin Walker argues that, “despite repeated protestations that the EU does not seek to become a federal super-state,” the organization is steadily increasing its powers to the detriment of the interests of its constituent states.
The Commission of the European Union is celebrating the forthcoming 10th anniversary of the euro with an ambitious new plan to direct the economic strategy of the world’s largest trading bloc. In a report to mark the anniversary, Monetary and Economic Affairs Commissioner Joaquin Almunia called Wednesday for the commission to extend its powers to include “adequate wage developments, flexibility and security on labor markets.”
While adding significant efficiencies, this would have serious consequences, Walker argues.
The EU’s various arms have a long history of steady encroachment on the national sovereignty of its member nations. The trade commissioner represents all 27 nations in bodies like the World Trade Organization. The European Court of Justice has become the dominant legal authority. The European Central Bank, which runs the euro currency, now sets monetary policy and interest rates for its members, even though they are often at different stages of the economic cycle.
This means that Spain, currently undergoing a painful contraction of its once-booming housing and construction sectors, cannot emulate the United States and slash interest rates to ease the pain. Only the ECB can do that.
It also means that Italy, which traditionally devalued its old currency to remain competitive in export markets, can no longer do so. As a result, Italy has been condemned to years of near-zero growth, which has led Italian Prime Minister Silvio Berlusconi to seek French support to push the central bank to cut interest rates and take more account of the need for more growth and job creation.
This is indisputably true. One could argue, though, that removing the ability of national politicians to pursue policies that might be desirable in the short term but have negative longer term consequences was precisely why the creation of a common currency was desirable in the first place. The constant manipulation of the lira, especially, was a constant problem and ultimately destroyed the predecessor European Rate Mechanism.
And, despite issues at the nation-state level, the EU has been a rather resounding success, as Walker admits.
The euro has clearly been established as a strong currency and as a potential rival for the dollar. Although most of the world’s central banks tend to hold twice as many dollars as euros and the OPEC countries still price oil in U.S. dollars, more international bonds are now denominated in euros than in dollars.
The euro has had a bumpy ride on world currency markets. When it was formally launched in January 1999, it traded at 1.17 to the dollar, and then declined sharply to 0.84 to the dollar. But since the Iraq war began swelling U.S. budget deficits, the euro has more than recovered and the subprime crisis in U.S. financial markets has seen the euro soar to 1.60 against the dollar in recent weeks, almost twice as high as it was four years ago.
Presumably, equilibrium will be reached at some point, as the US economy rebounds and various demographic and policy problems catch up with Europe. Having two strong international currencies is likely good for all concerned, even if the short-term fluctuations are problematic.
What’s interesting, though, is that the UK has thus far declined to give up the pound sterling. England has long been the most resistant to giving up its national sovereignty. Despite the Euro’s success, they’ve yet to be persuaded that the gains would be worth giving up some loss of control of their economic affairs.