LONDON — Many commentators seem genuinely surprised at the miserable performance of the euro. How, they ask, can it be that the new currency for most of Western Europe, which was billed to be the rival of the dollar and the world’s alternative reserve currency, is now trading against the dollar at 25 percent below its issue value? Against the yen, the story is roughly the same and only a little better against the British pound. What has gone wrong?
The puzzle seems all the deeper in light of reports of strong European economic growth and — not surprisingly — booming exports. The euro zone, so the numbers suggest, is really picking up after years of stagnation, with Internet use spreading fast through both consumer and business chains, with major rationalizing of industries, increasing cross-border mergers and acquisitions and real evidence of business dynamism throughout Europe generally.
This extends not just to existing EU members but to the applicant states like Poland, Hungary and Estonia in Central Europe, as well as to the Scandinavian countries, where Norway (not in the European Union) being the most wired state on the European landmass, and Finland is just behind.
Fancy theories and forecasts have been wheeled out to explain what has happened — and why most of the experts who confidently predicted a “strong” euro from the start have turned out 100 percent wrong.
The most frequent excuse is that the dollar remains so high. When it comes down (possibly with a big U.S. stock market correction), the euro will go up. After Nasdaq high-tech stocks plunged in April, this was supposed to happen. It didn’t.
Another theory argues that when a new single currency replaces 11 existing currencies, there is a sharp increase in liquidity during the transition phase (in the euro’s case three years) — equivalent to a big increase in the money supply as hundreds of billions of euros are printed while the old currencies still circulate. Therefore, says this theory, the new central bank — the European Central Bank in Frankfurt — has to tighten monetary conditions severely to mop up the excess. Its failure to date to do so makes the euro a natural “sell.”
Yet another theory is that the euro has become the world’s most attractive “export.” Investors have been delighted to find they can raise capital cheaply in the euro zone and then shift it into dollar and other currency investments in the United States, Japan and Southeast Asia. Hence a huge capital outflow from euro-land — although this must be getting less attractive as the euro sinks.
These are all basically economic explanations of what appears to be a bewildering phenomenon that defies the economic fundamentals. Yet they could all be directed at the wrong target.
The euro’s poor showing is probably not an economic matter at all. It is entirely to do with the politics of modern Europe. Those who do not understood these political complexities , or who naively believe (as many leading U.S. policy-makers appear to do) that Europe is rapidly “uniting” into a new state comparable with the U.S., are understandably wrong-footed by the situation.
The real, core reason for the weak euro lies in an observation made many years ago by former German Chancellor Helmut Kohl. A European single currency, he said, would only work with full political union in Europe — i.e., a single governmental authority alongside the new single central bank.
But no such single authority exists, nor is it ever likely to, much as some Europeans would wish.
Instead of one clear source of political authority there are 11 national governments with their own domestic agendas, their own budgets and spending priorities, their own political pressures, lobbies, ambitious ministers and electoral concerns. Each of these may be constrained somewhat by their promised adherence to the stability pact thta is supposed to check national budgetary incontinence. And each nation is constrained anyway by the straightjacket of global finance.
But within these limits there is room for lots of differing and publicly expressed views about the euro and the ECB’s policy, as well as about taxes, spending, social welfare and government protection. France has one view, Germany another, Ireland a third and Austria, to whom no one will currently speak because of its politics, a fourth.
This is the euro’s far-from-united and far-from-reassuring backdrop. Ironically, while the declared aim of the founding fathers of the euro was to take currencies and exchange rates out of politics, the hydra-headed system for running it has instead created a politically super-sensitive currency that for the foreseeable future is bound to remain volatile, unattractive and unpredictable.
Meanwhile, in Britain, it is hardly surprising that reluctance to join this unhappy euro club is growing. Japanese investors in Britain may dislike the high pound and long for a better pound-euro exchange rate.
But the reality is that British authorities have little power to change things. It is to the euro zone that complaints should be addressed. Somehow the sinking trend must be reversed. The pound is not too strong. It is the euro that is too weak.
The new single currency will struggle on and it may rise or fall further against the dollar, the yen, the Swiss franc and the pound. A small rise is now probably due.
But a single currency with 11 masters can never dominate the global stage. It is as simple as that. It was the political advisers, not the theoretical economists, to whom the heavy investors in euros in 1999 should have listened. Had they done so, they would have saved themselves a great deal of money. Pushing a reluctant Britain into this unstable system could lose them a great deal more.
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