Economy Euro

Eurozone crisis: Can’t have your Guinness and drink it

26 November 2010
Le Monde Paris

The euro is undoubtedly weakened by the Irish and Greek crises but, on international markets its value remains assured and it warrants being defended, argues French leader writer Alain Frachon from the daily newspaper Le Monde.

Due to the crisis, some have adopted a self-pitying tone and a melodramatic lexicon to accompany it. This chorus of Cassandras provides a number of variations on the same theme of which the following are a few examples. The euro must be saved. The “beast” is ill and may die. We told you so, you can’t create a monetary union without political unity.

British press fails to dissimulate its joy

Lost in their Faustian ambitions and their mad claims to turn Europe into a global player of the 21st century, the eurocrats begat a monster called the eurozone. The single currency isn’t tenable, it is the product of political will, not of an economic reality, it is contrary to free-market mores, therefore it will collapse. If it doesn’t happen tomorrow it will be the day after tomorrow, contaminated by the weight of public or bank debt in Ireland, then in Portugal followed by Spain and so on.

Yes, there’s nothing like reading the British press to lift one’s morale – it’s a delight every morning. A case in point is the brilliant and ultra-conservative Daily Telegraph, a must read, in which each line fails to dissimulate its joy at the troubles of the euro. But while the commentaries on the Irish crisis in the Financial Times and The Economist are more sophisticated, they are of the same ilk: the single currency can not hold on and it will loose some of its member states. This goes beyond press commentary or the wishful thinking of leader writers, it’s become an ideological battle.

This London-based artillery barrage gives cause for concern because it reflects the thinking of many market operators. Therefore, as is done at the Debating Society of the London School of Economics, let’s lay out the counter arguments.

Europeans have drawn the lessons of Greek crisis

It should be pointed out that Ireland’s troubles are due to delirious economic policies, not to being a member of the euro zone. It should also be noted that, although not in the euro zone, Britain’s public finances are in worse shape than those of France, a founding member of monetary union.

It is clear that the euro zone is going through recurrent crises due to the weight of the debt of its weakest members. Unfortunately, the markets will continue to test the sturdiness of monetary union. As long as they have doubts, they will cause the rates at which states on the periphery of the zone borrow money to rise. Whether to fight this with the other euro zone states providing guarantees to bail out the weaker states, using, in the end, the tax-payers’ money, is a political decision. The answer is political also: yes, the euro is worth the battle.

Europeans have drawn the lessons of the Greek crisis. They now have two safety nets: the European Financial Stabilisation Mechanism (€60 bn) and the European Financial Stability Fund (€440 bn). To this must be added the support offered by the International Monetary Fund (IMF) which is prepared to add funds of up to 50 percent of the European Union (EU) contribution. In all, a total of €750 bn can be mobilised.

Emerging Asian nations believe in the euro

The agreement between Dublin, the EU and the IMF led to an aid package of 85 billion euros, which leaves some wiggle room. If investors were wary of the euro, it would have collapsed after the Greek crisis or it would be plummeting today with the Irish crisis. This is not the case (even if it has lost some of its value). This is because, for the most part, the euro is a success. It is the world’s second reserve currency: 62 percent of central bank reserves are in US dollars, 27 percent in euros, 4 percent in British pounds and 3 percent in yens. That means that there are many who have an interest in seeing the European single currency remain healthy.

To date, no state or private Asian fund has sold off its euro positions. Emerging Asian nations believe in the euro. The future will consist of three or four major monetary zones. “For any of its members to give up the euro would be a historic error,” argues French economics professor Jean-Hervé Lorenzi of the University of Paris at Dauphine.

It is true that managing the euro requires following certain rules including: giving up fiscal sovereignty (Dublin was aware of this); cutting down structural imbalances within the zone such as Germany’s trade surplus (Berlin should admit this); accepting, including by “major” countries, the principal of sanctions decided by those that follow the rules even when the latter are “small” countries (Paris must accept this); co-ordinating budget policies before the budget is sent to national parliaments for approval and convergence of banking regulations. Perhaps Dublin’s major university, Trinity College, should begin teaching the following economic theory: you can’t have your Guinness and drink it too.

Translated from the French by Patricia Brett