The Pathos of Politics (96-1) The Euro

The Euro

A continental currency, resting on all Europe as its capital, would replace and bring down all the absurd varieties of money that exist today. ~ French poet Victor Hugo in 1855

The idea of a supranational currency has been around for a long time. Napoléon Bonaparte proposed that there be 1 currency for all of Europe, under French leadership, naturally. John Stuart Mill advocated a single European currency as part of an inevitable progression toward a single global money. Winston Churchill, in proposing a “United States of Europe” in 1946, endorsed a single currency.

Transnational money had more of a history than just as a thought exercise. The Latin Monetary Union was formed in 1865 and lasted until 1927. It had 5 states joined by treaty: originally France, Belgium, Italy, and Switzerland, with Greece joining in 1867. 8 other nations were actively engaged. Neither Germany nor the UK participated.

Originally based upon a bimetallic standard, the Union was hurt by fluctuating silver prices. The standard shifted to solely gold in 1873, but that proved insufficient in light of a terminal disease: debasement. France and Italy printed paper money beyond metal backing. Greece, its economy perpetually weak, cheated more simply by decreasing the amount of gold in its coins.

Denmark, Sweden, and Norway managed a Scandinavian monetary union from 1873 to 1920. Though the currencies were not unified, they were tightly linked, with stability abetted by close cooperation among the central banks of the 3 countries.

A gold standard held sway globally from the salad days of industrialization until unraveling in 1971. Far from an unalloyed success in terms of promoting economic stability, the standard at least facilitated international trade.

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The Euro represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. ~ Wim Duisenberg, President of the European Central Bank, in 2002

The dissolution of the gold standard left Europe struggling with the monetary turbulence that characterized the 1970s. The leaders of France and Germany determined to create a closer union.

The resultant monetary system was called the Snake, which began in 1972 and lasted until 1979. The Snake attempted to stabilize floating member currencies via state interventions in the foreign exchange market. It did not work well.

The UK and Ireland quickly withdrew. The French and Italians lacked the requisite discipline to batten down their currencies with sensible fiscal policies. Only the ever-staunch Germans had the will to fight the currency markets.

European governments were not savvy enough to adhere to the old adage: “once bitten, twice shy.” The European Monetary System (EMS) supplanted the Snake, with the European Currency Unit (ECU) as a market-basket surrogate of a single currency. Though the EMS was more hardheaded, the experiences during the days of the Snake were a harbinger of things to come.

Like the Snake, the ECU only worked when times were good. The mechanism blew apart after Britain joined.

The UK faced a deep recession in 1992. Currency traders were dumping the pound. Rather than fight the ECU, Britain joined it.

Germany showed no inclination to intervene in the markets on behalf of the pound, or to adjust its own interest rates to support the UK. So, after a desperate battle with the markets that cost billions of pounds, Britain was ignominiously ejected. (16 September 1992 – Black Wednesday – was the day Britain was booted from the EMS. In the event, Hungarian-American currency speculator George Soros made over £1 billion in profit by short-selling sterling.) Italy, also unable to keep up because of its lackluster economy, was booted the very next day.

Soon thereafter, the trading bands for the EMS widened to 15%: a gap vast enough to stay any sense of stability. The EMS was, in effect, dead.

Having failed in 2 attempts at monetary stability, the Continent’s leading politicians decided to double down and create a single currency, which only in their dreams would be impregnable to the whims of the money market.

The 1992 Maastricht Treaty called for a common monetary exchange unit: the euro, which was introduced in 1999. A central bank was established to manage the new currency.

Supporters of a single European currency touted that it would boost trade by eliminating foreign exchange fluctuations and thereby reduce prices.

It will be extremely important for the euro area to restrict entry to those countries which are ready in terms of their economic and anti-inflation policies. In monetary union, all the participating countries must be in a position to stay the course unaided. ~ German economist Hans Tietmeyer, president of the German central bank, in 1998

By treaty, to participate in the euro, members supposedly had to meet strict political-economic criteria. In actuality, several states came up short. Italy and Belgium were granted entry with public debt exceeding 120% of GDP. Despite hemorrhaging massive fiscal deficits, Greece vowed newfound rectitude, and so fudged its way in.

It’s the oldest democracy in the world, but not the most stable country in monetary terms. It would have been better to wait until Greece showed it was able to keep public finances and inflation under control. ~ German political economist Wilhem Hankel in 2000

Britain, Denmark, and Sweden sagely opted not the join the euro.

Once joined, mindless optimism reigned. There was no monitoring, scrutiny, or sanctions against countries that were profligate or otherwise negligent in their community obligations. No procedure was put in place for a country to leave the Eurozone and return to a sovereign currency.

Under a mirage of stability via monetary union, individual countries went about their merry way in the euro’s early years. The eurozone quickly became unbalanced; its fragility and internal volatility masked by interconnectedness.

In essence, the euro siphoned money from the core of Europe out to its periphery. Bankers and speculators made fortunes in a game that resembled real-life Monopoly. It was a unsustainable scheme that went unremarked for years.

Whereas Germany was toting up huge fiscal surpluses, the Mediterranean countries were piling up debts. Spain, for example, was consuming 10% more than it produced every year. Portugal, Greece, and other peripheral countries were financing their extravagance by borrowing money from northern stalwarts, notably Germany, the Netherlands, and Finland.

The fiscal tote board became a ledger of creditors and debtors on a massive scale. The imbalances were easily swept under the rug of a common currency.

While the core countries – Germany, France, Austria, Belgium, and the Netherlands – were doing well enough, inflation was eating away at the economic health of the peripheral countries. Huge trade gaps opened up but were smoothed over by the banking system. The euro was a financial crisis waiting to happen.