Why the Euro will Fail
Nominally, the Euro is being offered as (1) a way to achieve greater economic prosperity, (2) an alternative to the U.S. dollar, and (3) a means by which inter-country tensions can be reduced. It will fail on all those counts.
A nifty thing about a common currency is that it forces a common monetary discipline on the participants. If the participants share a common monetary philosophy, internal stresses are minimized. The problem in Euroland is that the countries involved have wildly different monetary histories (and presumably different expectations) due to their markedly different monetary philosophies. For example, the Germans are (were) rightly proud of their Deutschmark, due, in no small part, to their monetary discipline. The Italians, on the other hand, have a history of monetizing their national debt, producing severe inflationary pressures.
A country's monetary philosophy has many policy implications, which manifest themselves in many ways, such as government debt, size of the public sector, inflationary forces, expectations of the governed, etc. Try to imagine the Italians living under the austere discipline of a Prussian monetary policy. There would be riots in the street. (And in fact there were riots, when tight money policies were attempted in the 70's and 80's).
If Euroland component countries have wildly different expectations, why has there been relatively quiet acceptance of the Euro transition? One great advantage for the Euro-dreamers has been that the Euro was implemented during a time of great economic prosperity. The 90's were the time of the great, speculation-driven, Clinton Bubble. Public coffers were overflowing. Now that the Bubble has burst, expect growing economic problems and rising unemployment with resulting pressures on political and monetary policies. Even in these relatively good times, the Euro has been under pressure. Its value, relative to the US dollar, has fallen some 25% since its introduction 3 years ago.
The Euro's first major hurdle will occur when the economies of Euroland experience dissimilar conditions. This will force some hard choices. Should any of Euroland's weaker players slip into recession, expect the pressure on the Euro to inrease dramatically as political compromise steps in. The hoped-for formulation would be for the weaker countires to engage in significant fiscal discipline. However, local politics wil prevent that from happening.
The second major problem with the Euro is the resulting creation of the bureaucratic superstructure. A federalized layer of bureaucrats is being put in place in Euroland. Here the problems will be legion. Checks and balances are limited, so expect the size of this layer to grow inexorably.
It has been suggested that this new political entity will be equivalent to the US federal government's role, but this mischaracterizes the nature of the beast. The countries involved all have sovereign government bureaucracies in place already; think ministries of defense, judiciary, security, welfare, etc. None of the exisiting layers are to be eliminated (that would be "unfair"). So new layers are to be added to coordinate and implemement new Euroland laws, edicts, and policies among the various countries.
While it could be argued that a more efficient economic engine can easily absorb this additional cost, it is important to remember that Euroland is not noted for its efficiency and innovation. Take sluggish, socialist-leaning countries, tie them together with a new layer of bureaucrats and what is the result? An economic powerhouse, or something that more closely resembles the old USSR -- a socialist, centralized, supra-national bureaucratic backwater? Internal stresses will grow as additional socialist laws and programs are put in place to accommodate various "unfair" economic and political dislocations. One nation's economic advantage becomes another's political problem. The Eurocrats will be asked to step in and "fix" things.
Euroland officials are already admitting privately that decision-making by the current European Council is already close to unworkable. And they fear it could be paralysed when up to 10 extra nations from southern and eastern Europe join in 2004. Their solution? Add a new management layer, an "
EU super council" comprised of predominate Euroland countries. And so it grows.
The US has been relatively quiet on this whole issue. In part, it is because the issue is somewhat arcane. After all, to most people, economics is boring. Plus, the whole issue came to fruition during the time of Clinton. He and his ilk share in the vision of a political superstate, even at America's expense. Many on the left are watching in hopeful anticipation of the Euro's success. Conservatives, on the other hand, should realize that this will inevitably knock the Europeans for a loop. A set of major economic competitors (and problematic world allies) are in for a bumpy ride. Best to keep quiet while they shoot themselves in the foot.
The Euro will fail in its ostensible economic goals, but it will succeed in its true hidden ones, the promotion of a 'new European Soviet,' as Mikhail Gorbachev put it during a recent visit.
If the participants share a common monetary philosophy, internal stresses are minimized. The problem in Euroland is that the countries involved have wildly different monetary histories (and presumably different expectations) due to their markedly different monetary... You forget that there are things like the ECB that decides the monetary policy, a sort of decisional center, if not yet a government, that give the hints of all the economic (and not only) politics, massive economic interchanges, harmonized laws, a common level of income/ education/ social benefits...
Moreover ,the integration process is somothing taken for granted by most of the population, and it is going to keep on.
For example, the Germans are (were) rightly proud of their Deutschmark, due, in no small part, to their monetary discipline. The Italians, on the other hand, have a history of monetizing their national debt, producing severe inflationary pressures.
A country's monetary philosophy has many policy implications, which manifest themselves in many ways, such as government debt, size of the public sector, inflationary forces, expectations of the governed, etc. Try to imagine the Italians living under the austere discipline of a Prussian monetary policy. There would be riots in the street. (And in fact there were riots, when tight money policies were attempted in the 70's and 80's).
My personal conclusion is that you have never been neither in Germany nor in Italy in the last ten years. If you read international newspapers, apart from comic books, you should know that in a meeting held in 1993 between the major authorities of Germany and Italy, they decided that Italy needed infact a "Prussian" fiscal discipline, to avoid an Argentina-like end that at the time seemed unavoidable. Of course the support of the Bundesbank was necessary,and the present conclusions are two: 1)After the big scare, now Italians dislike (personal and public) debt like hell and see the hawkish policy of Wim Duisemberg as a guarantee against lavish expenditures by corrupt politicians and the erosion of their wealth. 2)As i said berfore, Northen Italy's macroeconomic data mirrors that of Western Germany, and this situation is not going to change since those areas are integrated (almost) like New York and New Jeresy.
If Euroland component countries have wildly different expectations, why has there been relatively quiet acceptance of the Euro transition?
Frankly, this sentence is quite meaningless.
Even in these relatively good times, the Euro has been under pressure. Its value, relative to the US dollar, has fallen some 25% since its introduction 3 years ago.
Currencies fluctuate. The Euro has got some problems, because Euroland's economy got problems. Anyway, it appreciated 6% since october.
I know the EU institutions are inefficient. But that's the European way: slow adjustments. I'm not worried about the future of Europe (and the world ,consequently), because all the people i know have, more or less, democratic beliefs and behaviours (i.e. nothing to do with the soviets), and the idea of Europe they are developing ( a variegate puzzle of friendly nations) is opening their minds to a more wide vision of the world.
The future of Europe is questionable, but saing that the Euro is a joke is the same to say the Earth is flat.