Europe's Economic Pain Re-opens Debate on Currency
“We told you so.”
When the treaty establishing Europe’s common currency was approved in the early 1990s, Europe’s political and business elite had high hopes that it would bind the Continent’s disparate economies and often bickering nations as never before.
And as the euro made its debut in the early 2000s, there was an outpouring of support from many citizens pleased that they would no longer have to change Spanish pesetas to French francs or Dutch guilders to German marks as they crossed borders from one country to another.
But not everybody was caught up in the celebration. A noisy band of dissenters, many of them economists from outside the Continent, issued a warning: the euro was doomed to struggle, they proclaimed, maybe not immediately but certainly before long. Different countries would pursue such different economic policies, they argued, that it would ultimately place an unbearable strain on the currency and some of its members.
Today, many of those predictions — handily dismissed at the time — are coming true.
For most of 2010, Europe struggled to contain a debt crisis that has prompted investors to drive up the yield on government bonds. And despite two bailouts — for Greece and for Ireland — the anxiety has not dissipated, and attention has turned to other faltering economies like Portugal and Spain.
Last Friday, the cost of insuring Greek debt pushed higher on speculation that Athens might restructure its debt in 2013. That followed a warning on Thursday by Fitch, a major credit rating agency, that a downgrade of Greek debt was imminent. Fitch had already downgraded Portugal’s debt on concerns about its growth prospects and its ability to cut its deficit.
“I knew from the very beginning that putting all these heterogeneous countries together would not work,” said Wilhelm Nolling, a member of Germany’s Bundesbank governing council before the establishment of the European Central Bank who is now a professor of economics at the University of Hamburg.
If history is any guide, these critics say, even more troubles could be on the way. They point to a handful of little-known and less ambitious common currency efforts that failed in the past.
To be sure, Europe’s decision to embrace the euro was widely debated at the time, and even supporters worried that a monetary union without more political and social cohesion to back it up might founder.
But the criticisms were glossed over in the euphoria at the end of the cold war and the hope that firm rules for countries joining the common currency would secure a unified economy and forge an unbreakable European identity.
The most forceful opposition was centered in Britain, which, along with Denmark, agreed to sign the Maastricht treaty in 1991 setting out the path to a European single currency only after insisting on the right to opt out of any final step.
And it was not just the perennial euro skeptics of Britain’s Conservative Party who warned of troubles ahead. Ed Balls, then an obscure editorial writer for The Financial Times, wrote a report in 1992 identifying what he termed a crucial flaw in the plans for the euro: Europe lacked the type of federal taxes and transfer payments used in the United States to ease economic divergences among its many states.
'Political Will Is Not Enough'
Published by the Fabian Society, a left-of-center research group in London, the Balls paper caught the eye of Gordon Brown, then shadow chancellor for the out-of-power Labour Party.
Mr. Brown hired Mr. Balls and then seized on his core argument when the Labour Party gained power in 1997 to insist that Britain stick with the pound — despite general support for the euro from Prime Minister Tony Blair and a majority of the Labour Party hierarchy.