What
is Wrong with the Euro?
The Euro-Zone Lacks the Characteristics Necessary for a Successful Single Currency Area
The
One-Size-Fits All Interest Rate
The
European Union's False Assumptions About European Monetary Union
THE EURO-ZONE LACKS THE
CHARACTERISTICS NECESSARY FOR A SUCCESSFUL SINGLE CURRENCY AREA.
The euro-zone does not meet the
requirements widely recognized by economists as being essential for a single
currency area to succeed. History
shows that successful single currency areas are almost invariable nation states
such as the United Kingdom and the United States of America.
There are three basic characteristics that need to exist.
1) The
differences in competitiveness and living standards between the different
regions of the single currency zone need to be reasonably small.
This
is definitely not the case as there are widely differing levels of economic
competitiveness and living standards across the euro-zone: from Germany, the
world's third largest economy, with a world financial centre in Frankfurt, down
through to countries like Greece and Portugal that are still relatively
underdeveloped industrial economies.
2) It needs to be
reasonably easy for those without jobs in depressed regions to travel to more
prosperous regions to seek work. Some regions will invariable do better
economically than others and unemployed workers in depressed areas need to be
able to move reasonably easily to find work in the more prosperous areas. This can be difficult enough in a country with a common
language, culture and legal system. While
it may be relatively easy for the young, highly qualified and multi-lingual to
move about Europe it is not going to be a realistic option for most of those who
find themselves unemployed in their particular region of the euro-zone.
3) There needs to be
sufficient taxation and spending power in the hands of the government of the
single currency area to even out disparities to an acceptable extent.
Successful
single currency areas such as the United Kingdom and the United Stares of
America find it necessary to make large budgetary transfers of tax revenues
between the regions as subsidies and investments to uncompetitive or
disadvantaged regions. The EU
simply does not have sufficient budget to use in an attempt to even out the
disparities in economic performance of its member states.
THE ONE-SIZE-FITS-ALL INTEREST
RATE
The common interest rate set by
the European Central Bank for the Euro-zone is bound to be wrong for at least
some if not a majority of member states at any one time.
Too high a rate will restrict spending and growth and too low a rate
means runaway inflation. If
the governments and central banks of individual countries find it hard enough to
get it right for their economies how can the European Central Bank hope to get
it right for twelve different economies?
THE EUROPEAN UNION'S FALSE
ASSUMPTIONS ABOUT EUROPEAN MONETARY UNION.
The EU launched the euro based
on a number a false assumptions about European Monetary Union.
'EMU works in practice'.
There
is no evidence that EMU will work. All
the evidence is that previous EMU type experiments, e.g. the Snake, ERM, is that
they did not work and had to be abandoned, and with considerable cost to the
participants. EMU has no escape
mechanism; it is an act of faith undertaken for purely political motives.
'Lasting economic
convergence can be achieved'. To
arrive at the launch of the euro the twelve participating countries agreed to
meet the famous 'convergence criteria' of the Maastricht Treaty.
Economic convergence was to be assessed by reference to four criteria:
inflation; national budget deficits; being in the ERM narrow band and not
devaluing; and the long-term interest rate level. In fact some countries qualifications were deliberately
fiddled and fudged to ensure they made the grade. The unspoken and unwritten
assumption is that even if all four criteria could be met by all the
participating countries for a brief period of time that such a 'steady state'
could then continue inside EMU thereafter.
There are no grounds whatsoever for supposing that this will happen.
'Democratic
accountability is unimportant'. The
Treaty on European Union in effect says that national parliaments and
politicians cannot be trusted to make vital decisions about the economic life of
their countries, and that these decisions should be left to central bankers and
professional civil servants. Un-elected
bureaucrats have the right to decide a nation's interest rates, exchange rates,
money supply, and levels of public expenditure.
The assumption is that they will make a better job of it than elected
politicians. Politicians have their
shortcomings but under a democratic system they can be removed and new ones with
different policies put in their place - that cannot happen under EMU.
'Low
unemployment flows from low inflation'.
The
primary policy of the European Central Bank is stated over and over again as "price
stability", i.e. the pursuit of low inflation, but also to promote,
"sustainable and non-inflationary growth", and "a
high level of employment". The
experience of Britain and most of her European neighbours over the last thirty
years is that the pursuit of 'price stability' will lead to higher levels of
unemployment. There is a clear
correlation between high unemployment and low inflation.
High inflation rates are not good for an economy but a balance has to be
struck between the rate of inflation and the rate of unemployment. EMU has
been set up to have an overwhelmingly deflationary bias.
'Monetary
policy can control inflation'.
The
European Central Bank can influence only one area of the total economic process,
the money supply and interest rates. The
central bank has only limited influence on the major income flows in the economy
which are generated by the state and collective bargaining and which causally
determine inflation. Historically
high inflation in the UK has not been only, or even mainly, the result of lax
monetary policy. The ECB
has enshrined in the treaty which set it up the pursuit of an economic
indicator over which is has no control as such, but in pursuit of which it may
cause untold damage to employment, growth and investment.
'Fixed exchange rates
are better than floating exchange rates'.
Britain's
experience in the twentieth century has been that fixing or managing sterling
against gold or a foreign currency has damaged the real economy: The Gold
Standard, the Bretton Woods Agreement, The Sterling Area, the unofficial
Deutschmark peg, and the ERM have all demonstrated this.
The effect has been that for most of this century Britain has had to hold
interest rates higher than has been necessary or desirable.
Flexible exchange rates enable economies to adjust smoothly to the
uncertainties and changes that affect them.
The fixed exchange rate in the euro-zone is a triumph of hope over
experience, unsupported by any evidence that the consequences for European
economies, singly or together, will be beneficial.
'Independent
banks work better than dependent banks'.
The European Central Bank is
'independent' and the
assumption is that independent banks are always better than 'dependent' banks.
The evidence for this is inconclusive.
It makes far more sense that the head of an independent national bank
should be ultimately answerable to the government or parliament of an individual
country and economy as a check and balance. The Bank of England is now
'independent' but holds its license from Parliament. The ECB is independent of
all the governments of EMU members states but the balance of probabilities is
that the ECB will implement its policies very much with an eye on the
requirements of the two biggest economies in the euro-zone: Germany and France.
Where then will its 'independence' be in regard to the needs of the
smaller economies?