The Euro

– A Patient. Essay, Research Paper

The Euro A Patient.

It was the horror and devastation of the Second World War which gave the impetus to move towards unity in Western Europe. However, there were and remain divergent views on how this should be achieved, to what extent it should be achieved and by when it should be achieved. Rodney Leach has stated that since World War 2, there have been two contrasting visions of Europe s destiny, one of which has come to predominate. It could be said that the European Union today is a would-be federation at least halfway towards its goal. The movement can only be forward because of its ratchet structure, an effect derived from acquis communautaire the doctrine that each step towards integration is irreversible (also stemming from the Treaty of Rome s paramount aim of even closer union). The rival vision of Europe was of allies voluntarily co-operating with only the absolutely necessary common laws. It is federalism which has won the upper hand.

The establishment of a single currency is obviously a vital step if the goal of federation is to be achieved. There still remains dispute on what federation actually means. The goal for many is total economic and political union.

As far back as 1970, the Council of Ministers began to prepare plans for full economic and monetary union. It appears to have given no consideration to the pros and cons of monetary unions. The Council only looked at the routes to achieve monetary union. The routes chosen involved as John Mills writes an uneasy marriage of Keynesian and monetarist approaches .

It is this which helps to explain some of the difficulties which have arisen with the implementation of the Euro. The Keynesian economists believed that there should be convergence of economic performance and policies among member states, with monetary union to follow when these conditions had been established. The monetarists believed that the best way forward was to establish monetary union immediately on the grounds that this would create the necessary economic convergence. In the event, the compromise was to achieve some convergence of economic performance and then to have the full rigour of monetary union.

Early efforts involved the Snake, the Snake In The Tunnel and the Exchange Rate Mechanism (which eventually had 15% wide fluctuation bands). The Maastricht Treaty of 1991 obliged all countries intending to enter into a single currency to meet convergence criteria. However, by 1998 the criteria (which related to inflation rates, interest rates, budget deficits, national debt and exchange rates) were being fudged and were being interpreted to suit particular circumstances of individual member states, John Mills goes as far as to indicate that some European economists believed that entry into the single currency was built on a foundation of false statistics and unsustainable trends. Furthermore, it must be noted that the criteria were solely related to financial variables and none of them to economic policies such as growth, full employment, and inflation at an acceptable (as opposed to the lowest possible) level. This danger had been pointed out by Keynesian economists in the early 1970 s. Possibly only Luxembourg truthfully matched the Maastricht criteria at the entry date of January 1st 1999. It is this that was in part the cause of the difficulties in which the single currency has found itself.

The entry was greeted by celebration, self-congratulation and talk of a new era for economic and social advancement. But almost immediately problems arose. The euro s value plummeted week by week. At the end of the first hundred days the euro had lost 10% of its value against the dollar. Julian Coman at this time quoted a European Commission official as saying, we are not all converts. Frankly, one looks at the British economy, which is in the best state anyone can remember and has just worked out its own arrangements with its own independent central bank, and one wonders whether they are better off to stay out .

At this time there were those who said that part of the cause of the euro losing its value was because it was entangled with the economic problems of Germany.

There were signs in 1999 that Europe s economies far from converging were actually diverging and this was giving great concern to the supporters of the single currency. The question could be asked if it really matters if there is divergence. Jiten Borkakoti examines the lack of convergence in the economies of the Canadian provinces and the states of the USA where there were real exchange rate differences comparable to the EU. Borkakoti points out that political union preceded monetary union in many previous monetary unions e.g. Germany in 1871. On this basis the drive to political union could become stronger. Borkakoti is pointing out that lack of economic convergence does not inhibit overall economic growth.

In fact by March 1999 the Organisation for Economic Cooperation and Development had, with no exchange rate option available to counter economic structural difficulties, suggested that other solutions, such as the mass migration of workers, would have to be found to solve the region s chronic unemployment rate of about 12%.

However the OECD agreed that Europeans would not move between countries as Americans move states and neither would Brussels ever be trusted