Economy: The mess at the heart of the euro
24 November 2010
Writing for Les Echos, a French economist notes that the differences in how EU member states manage their budgets, pay scales and tax and welfare systems, relatively unimportant during prosperous times, have led to a lack of cooperation and solidarity in response to the current crisis.
The recent G20 summit only served to highlight the many obstacles to a concerted solution to the problem of global trade and currency imbalances, which exacerbate tensions between major economic zones, and, on a more local level, between countries in individual regions.
Of course, that is not to say that there is no prospect for peace in the current power struggle between the Americans and the Chinese. Let’s not forget that Wal-Mart needs its factories in Shanghai just as much as Beijing needs Wall Street.
But in the ongoing international wrangle over currency, Europe, largely divided, is consigned to passive role on the sidelines, while the euro serves as an adjustment variable to sustain interests of its rivals. In the wake of the Greek crisis in the south, tension has once again reached fever pitch with the Irish bailout in the north of the euro zone. At the same time, the probability that financial markets will attack one of the major economies of southern Europe, even France, is steadily increasing – a prospect that has been made all the more likely by the European Union’s apparent inability to establish a coherent policy. And all the while the vision of a united Europe is fast being replaced by the spectre of a multi-polar Europe.
Southern Europe in troubled waters
Having stayed out of the euro, the United Kingdom has hung on to its freedom to manoeuvre and is now steadily distancing itself from continental Europe. The declining value of sterling and its links with the Commonwealth and the Far East will enable it to stimulate its industry, and even to act as a European bridgehead for emerging economies exporting to the EU.
At the heart of the eurozone, Germany – now the dominant euro power – has adopted an eastward looking strategy, which has re-established its historic sphere of influence, while the westward looking policy prompted by the Soviet threat and the Berlin Wall has been set aside definitively. The development of ties with Central Europe and Asia has enabled German industry to win market share from rival EU economies. And with this in mind, it is worth noting that in many respects Germany’s trade surplus is simply a reflection of the trade deficits of its neighbours. Berlin clearly holds a winning hand. The countries of Eastern Europe have become its industrial workshops, Russia has become its storehouse of energy and raw materials, while China and the Far East have provided it with an excellent market for its household goods.
In the meantime, Southern Europe has sailed into increasingly troubled waters. Spain has seen its hopes vanish along with its property bubble, while Italy is struggling to protect its industry from increasingly powerful competition from Germany and emerging countries. Only the black economy seems to be unaffected…
It’s too late to turn back
As for France, the government in Paris lacks a coherent strategy. Austerity measures have undermined its consumption based economic model. Emerging countries have taken a major share of the market for its consumer products, while its household goods producers are increasingly unable to compete with the onslaught of German competition. And with this in mind, Alstom’s loss of the Eurostar contract, which has now been won by Siemens, is clearly symbolic of a more general malaise. The truth of the matter is that Germany is now a much greater threat to French industry than China.
Plans for European unity have never been in greater jeopardy. The hopes for economic convergence that were inspired by the introduction of the single currency have now been replaced by the grim reality of increasing disparity. In accordance with the theory of comparative advantage, individual countries have attempted to focus on their individual strengths – after all that is the whole point of monetary union. However, the fathers of the single currency could never have predicted the extent to which Europe would be thwarted by a lack of cooperation, the recourse to opportunistic strategies, and the fragility of solidarity of between countries. In short, the launch of the euro has done nothing to hinder the dogged pursuit of national interests which remain more dominant than ever.
And it’s too late to turn back. A decade of fiscal, budgetary, social divergences, discrepancies in wages and innovation, have left an indelible mark on member states’ economic models.
Nothing compels Germany to re-evaluate
The rejection of federalism has weakened the monetary union even further. The over-valuation of the European currency is now a major problem for France and the countries of southern Europe, increasingly unable to compete with emerging economies. But closer to home the problem is even more serious, because we have reached a point where several European countries have a serious problem of competitiveness in relation to Germany.
On close examination, the mechanisms that triggered the collapse of the European Monetary System in 1992-1993 have once again come to the fore. In the last days of the EMS, market attacks led Italy and Spain to devalue, while the pound was ejected. In a few months, the entire system of exchange rates was overhauled. Even the Deutschmark was revalued.
Of course, the context is different. Sterling has hung on to its freedom. With the euro, the ability to resist stress is much greater, but without devaluation or any alternative mechanism, weak countries will be hindered in their efforts to regain stability and competitiveness. And at the same time, there will be no compelling reason for Germany to re-evaluate. Which for Germany is... a fantastic opportunity.
Translated from the French by Mark McGovern