Whither the Euro?

Chris Waller July 2010
Mensa emblem

Or should that be 'wither' the euro? Given the current plight of the currency at the moment there are, in some quarters, serious doubts about whether it can survive.Firstly, a brief history of the euro. The euro, as an idea, was established as one aspect of the Maarstricht Treaty in 1992. Under that treaty, all states wishing to become part of the intended euro area had to meet strict fiscal criteria: a budget deficit of less than 3% of GDP, a debt ration of less than 60% of GDP, low inflation and interest rates near the EU average.The currency was introduced in 'virtual' form on January 1st 1999, but at this stage was only used in bank transfers, that is, it was not available on the street, as it were. Also at this stage, the exchange rates of the currencies of all the states intending to implement the euro were fixed. The euro finally hit the street with the introduction of notes and coins on January 1st 2002. For practical reasons there was a period of about two months, during which 'old' notes and coin could be exchanged for euros.The euphoria of those days has faded, being replaced by a round of recriminations, particularly from the German taxpayer who at present is bailing out the Greek government. How did it all go so wrong?

For those of you who have been reading this organ, and its predecessor, for a sufficient length of time, you will perhaps remember my series of essays, originally published in 1992/3 and reprinted herein in 2005 in which I proposed the idea that money could be viewed as a language. At the time, when the euro was about three years old and seemingly in reasonable health, I expressed reservations about its future.

Let me be clear: I am pro-European. My parents and grandparents were all embroiled in wars in Europe, these being merely the most recent chapters in a history of empires, conquests and wars going back two millenia. To my mind, anything that unites the peoples of Europe has to be better than the alternative. However, my enthusiasm for the European project is not unalloyed and I readily concede that Europe is far from perfect.

At a technical level the current travails of Europe and the euro are due to the haste in which countries were ushered into the club. Using 'creative' accounting techniques of which the late Robert Maxwell would have been proud, some countries were initiated even though they were ill-prepared. In 2005 the euro was held to be responsible for the low growth rates in the Eurozone, as a result of the Stability and Growth pact. Not surprisingly for a new currency (possibly the first truly 'new' currency in history), the emphasis was on stability in order to encourage the international currency markets to take it seriously. However, underlying all this was the broader political project of expanding the EU while at the same time deepening the connections between the member states. It was this prospect of deeper political union which had Margaret Thatcher stomping around Europe shouting, "No! No! No!". In retrospect, that eschewal of the embrace of deeper political union, and its concomitant fiscal union, may not seem to have been such a bad idea.

The countries which are suffering the most as a result of the present euro crisis are those which economists are referring to as the 'PIGS: Portugal, Italy, Greece, Spain - an unfortunate acronym, but I'm sure no slight is intended. With the exception of Italy, the other three countries are relative newcomers to democracy, all being under various dictatorships until the mid-seventies. All suffered the economic consequences of dictatorship and were substantially impoverished when compared to their European neighbours at that time. Their inclusion in the European Union must have seemed, to their respective peoples, a guarantor of democracy and a bulwark against any future slide back into dictatorship. The other European nations must also have viewed the inclusion of Spain, Portugal and Greece as a reciprocal guarantee that these nations would remain politically stable and thereby valuable contributors to the broader European economy.

All that said, the respective economies of those three countries made them an ill fit with the industrial northern European economies. While the intention was to create as political and economic union whose geometry was of classical Greek harmonic proportions, what we ended up with was Frankenstein's monster, cobbled together from incompatible parts, its head held on by a bolt.

The European Union, in my view, expanded too quickly and countries were allowed into the club before they were ready. Following the demise of the old Soviet Union one can understand why the Eastern European states were only too keen to join, but what was allowed in haste will be repented at leisure. Notwithstanding the technical issues surrounding the euro and its problems, there are the cultural issues. Returning to my thesis of money as language, there are deeper differences between the economies of Spain, Portugal, Italy and Greece and those of the northern European states which, while they may not be readily visible in the figures pored over by economists, are nevertheless significant. It perhaps panders to stereotypes to speak of corruption in Italian politics, but if one looks at the Corruption Perceptions Index listing in the Economist's 'Pocket World in Figures', we find Denmark, along with Sweden and New Zealand, as the least corrupt, with an index of 9.3, while Germany and Norway come in 14th place with an index of 7.9, leaving Ireland and ourselves in 16th place with an index of 7.7, all of which leaves Spain, Portugal and Greece somewhere lower in the table. Much of the recent rioting in Greece was directed against the corruption in political circles.

In my previous essays in 2005, I argued that the euro would ultimately fail for the same reason that universal languages have always failed: there is too much cultural weight bound up in a language - and there is too much cultural weight bound up in a currency. There have been over two-hundred attempts to create universal languages, from Reverend Schleyer's 'Volapuk' to Ogden's 'Basic English', yet none has endured.

It was interesting therefore to discover that the name of the euro, hardly a glittering example of linguistic creativity, was devised in 1995 by one Germain Pirlot, a Belgian Esperantist and former teacher of history. Did the manifest failure of Esperanto to become the world's unchallenged lingua franca not give him and the other architects of the common European currency pause for thought? Or did they imagine, as do all those in the grip of some obsession or other, that what failed repeatedly in the past will, for some unspecified reason, now work.

If the euro is ultimately to succeed then all the economies using it must all have the same 'shape', that is, they must have substantially the same structures and mechanisms so that they all respond similarly to a given economic stimulus. Countries cannot expect to join a club and continue to play by their own rules. The tensions resulting from the current problems of the euro will have repercussions well beyond the purely economic and fiscal realms. Shuffling money around and tinkering with the book-keeping will not solve this problem. The same political will which brought the European Union into existence will need to be applied once again to clear up the current mess and there will have to be some plain speaking.

Some commentators have predicted the demise of the euro within five years. If it does fail then that failure will serve as a metaphor for deeper political failures and perhaps an indicator that Europe is a spent force both economically and politically. My own view is that this need not happen but if the European Union is to survive then it must become a union of its peoples and not a just a union of technocrats shuffling paper around echoing corridors in Strasbourg. The rioters in Greece and the demonstrators in Spain will, I'm sure, be joined by others across Europe. Though alarming, it indicates the level of disenchantment among the people of Europe and the desire for something better. If the powers that be do not respond appropriately then the future could be, as the Chinese say, 'interesting'.

Chris Waller - Permission granted to freely distribute this article for non-commercial purposes if attributed to Chris Waller, unedited and copied in full, including this notice.

Members can discuss this and other articles on the economics forum att International Mensa.

About Us

Economania is the website of Mensa's internationally recognised Special Interest Group dedicated to economics, trade and finance.