The Euro’s Future

1 January 2003

The Euro’s Future

By Gwynne Dyer

“I want the whole of Europe to have one currency,” said the Emperor Napoleon in 1807. “It will make trading much easier.” A year ago his dream came true, more or less, and it didn’t even take a conquest to make it happen. But where does the euro go from here?

The simple answer is out and up. It spreads outwards from the existing twelve countries that abandoned their old marks, francs and drachmas for the euro last year to one or more of the three hold-outs among the existing European Union members, Sweden, Denmark and the United Kingdom, and then on to the twelve new countries scheduled to join within the next five years. And it goes back up in value from the rock-bottom $US 0.90 it hit last year towards the $1.17 it was worth when it was launched. (It’s currently at $1.04.)

The euro is not yet much loved by those who use it. There is a widespread perception that retailers used the change-over in currencies as an excuse to hike their prices — and of course they did. The overall inflation rate in the euro countries doesn’t show a big jump, so the economists deny that it happened, but in a number of everyday consumer items from newspapers to beer there was a cynical ’rounding up’ of prices that raised their cost between 3 and 8 percent.

The experts still promise that in the long run the new ‘transparency’ of prices across the euro-zone means that they will eventually converge towards the cheaper end of the spectrum. Maybe that’s true and maybe it isn’t, but there’s no going back to the old currencies anyway.

The real question (which is almost never discussed in front of the children) is how long it will take the euro-zone countries to give up enough of their sovereign independence to ensure the euro’s long-term survival. As it is currently run, the euro would be unlikely to weather a really major international crisis, and most insiders know it.

The problem with any currency union is that you have to impose one-size-fits-all monetary policies on quite diverse economies. For example, Germany’s high unemployment and low growth call for low interest rates and deficit spending at the moment, to get its economy moving again. Ireland, with low unemployment and high inflation, needs exactly the opposite to cool its economy down. But the new European Central Bank must set the same interest rate for Ireland, Germany and all the other euro-zone countries.

Even deficit spending is strictly controlled by the European Stability and Growth Pact, which tries to safeguard the euro’s credibility by imposing heavy fines on any government whose budget deficit exceeds 3 percent of Gross Domestic Product. One size really does have to fit all — and that can be very hard on some.

To be fair, any federation has to cope with these regional differentials while maintaining a single finance policy at the national level. The resulting problems are usually smoothed out by internal migration from poor areas to flourishing ones, and perhaps also by direct transfers of funds. The EU’s problem is that internal migration is hampered by linguistic and cultural barriers, and the EU’s common budget is not nearly big enough to transfer resources between member countries on a meaningful scale.

So the problems of economic divergence fester even in good times, and threaten the survival of the currency in bad times. Currency unions that are not backed by a single, strong central authority tend to founder when the going gets rough, and it sometimes does. There were at least six events in 20th-century history — the First and Second World Wars, the Great Depression, the Russian and Nazi revolutions, and the ’73 oil embargo — that the euro in its present form would be unlikely to survive.

There is probably enough time before the next shock for the EU to get things right, and the architects of the euro privately understand that there has to be far more integrated decision-making at the political level if the euro is to survive the storms that are bound to arrive sooner or later. They just haven’t mentioned it much in public yet: first you lure the punters into the deal with promises that it will be easy and painless, and once they have signed up, you tell them the real price.

The real price is probably worth paying, because the ultimate purpose of the euro is not economic at all; it is to embed all of Europe in an economic relationship that makes any return to the catastrophic continent-wide wars of the past unthinkable. But pretty soon now, the people in the know are going to have to reveal the next step of the journey to everybody else.

In fact, it’s starting to happen already. In mid-2001 Belgium’s finance minister Didier Reynders, who was doubling as the chairman of the 12-nation euro group, let a little of the real thinking slip out: “At a certain moment, perhaps in two years, we’ll have to put the question. Those who said yes to the euro will move ahead….You can’t indefinitely delay the question of political authority (for the euro-zone), and it’s logical that we’ll make a choice to pool our forces.”

Down that road, if it is travelled to the end, lies the United States of Europe.


To shorten to 725 words, omit paragraphs 7 and 8. “Even deficit…scale”

The euro was first introduced in the financial markets in 1999, but the actual paper money and coins only went into circulation on January 1st, 2002.