June 6, 2005
I’ve always thought that the European Union was a dumb idea—hmm, let’s take a bunch of wildly different economies and cultures, force them into a single-currency zone, take away their control over monetary policy, and see what happens (hint: economic chaos). So it wasn’t exactly a surprise last week when French and Dutch voters used one of their few remaining weapons—the referendum—to bury the EU’s would-be constitution. Watching the Eurocrats squirm in the wake of this defeat has been entertaining:
[I]n Brussels, the humiliated courtiers of the European Union sat gloomy in their gilded salons, wondering how to hold off the upstart mob. Jean-Claude Juncker of Luxembourg, presiding over the EU’s Council of Ministers, tearfully suggested that Europe’s voters be asked to vote again “until they get it right”. Lord Kerr, Britain’s envoy at this court, described the referendums as a “macabre ritual”. Jose Manuel Barroso, commission president, warned of a “risk of contagion” spreading across Europe. Only in Brussels is the word democracy synonymous with disease.
…The countries of Europe must now seek a new political narrative and a new and limited destination. As the Dutch foreign minister admitted last week, the EU was always a journey rather than a goal. Europe set off after the second world war like Ulysses on an odyssey. It diverted itself to Brussels and found a city full of horrors, Cyclops, the Sirens and Scylla and Charybdis all in one. It plotted schemes and interventions more potent than the dreams of empires past. It measured swimming pools, counted chemicals and fixed the length of ladders. It taxed its subjects to distraction. Ulysses may have gone along with this, but his crew have mutinied.
…This past week has seen democracy explode its most dangerous weapon, a referendum. The release of energy was awesome. Power asked a question of freedom and was given a punch in the face. Such moments are rare and they are beautiful. They are also menacing and full of meaning.
OK, score one for democracy. But none of this helps address the region’s growing economic woes. With no control over monetary policy, Italy, Germany France and Portugal are struggling to fight off recession—and fiscal policy isn’t helping, despite budget deficits that far exceed the EU’s (unenforced) requirements. The euro’s appreciation against the U.S. dollar has made already overpriced European goods even less competitive, and slowed growth still further. Cultural and language barriers, along with every kind of labor-market protection, mean the much-vaunted “single market” is about as unified as the Korean peninsula. As The Economist points out (subscriber-only link):
Even before the euro was adopted, in 1999, it was clear that neither the EU nor the 12-member subset that has joined the monetary union was an optimal currency area. Ideally, currency zones should be compact and homogenous enough to show little regional variation in business cycles—otherwise a one-size-fits-all monetary policy will leave some regions lingering in recession, while others grow so fast they overheat. Many argue that this is what is happening in Europe, where a few countries, like Ireland, are experiencing rapid growth while big economies, like Germany and Italy, stagnate.
There are ways to mitigate imbalances within big currency areas. Even America is not an optimal currency zone; its regions sometimes boom or shrink out of sync with the rest of the economy. But America has important features that temper the problems of unified monetary policy. Federal programmes act as automatic fiscal stabilisers, siphoning off tax revenues from booming areas and transferring them to ailing regions as unemployment insurance or health benefits for the poor. America’s labour market is also highly flexible. This allows wages and prices to adjust downward, giving depressed regions a competitive advantage that can attract new companies and thus smooth out regional disparities. And workers in declining industrial towns frequently pack up and move across the country to find work; capital flows freely as well. Without these mitigating factors, people in depressed areas could easily be trapped in a cycle of stagnation.
In Europe, by contrast, few mechanisms exist to bring the euro area’s widely divergent business cycles into sync. The ECB has been trying to chart a middle course between slow- and fast-growing countries while establishing its credibility as an inflation-fighter. The result has been a monetary policy that is too “hot” for some, too “cold” for others, and “just right” for almost no one.
All of which has left Europe’s politicians looking for a scapegoat—and finding it in the euro:
On Wednesday June 1st reports surfaced that Hans Eichel, the German finance minister, had been present at meetings where the possible collapse of the euro was discussed—and that the German government, which has suffered recent electoral defeats thanks to economic woes, may be planning to blame the euro for the country’s problems in the run-up to the coming general election. On Friday, an Italian newspaper published remarks by Roberto Maroni, a government minister from a populist northern party, in which he excoriated the euro for causing Italy’s poor economic performance and advocated reintroducing the lira. Currency markets twitched, as a euro-area implosion began to look distinctly possible, if not imminent.
Possible, but not yet likely. Pity—it would be a fitting end to the Eurocrats’ delusional dreams.
UPDATE: Tyler Cowen has some interesting thoughts on what the end of the Euro might look like.
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Tracked on June 8, 2005 2:46 PM