Friday, November 18, 2011

Difference Between the EU and Euro

I often find people talk of the European Union and the Euro (single currency) as interchangeable ideas. Recently, the German leader Angela Merkel stated defending the Euro was essential for maintaining the post war gains of the European Union. The new Italian new 'technocrat' leader Mario Monti warned that a breakup of the Euro would bring its users "back to the 1950s." - (before the creation of EEC.) Yet, arguably, the European Union would be a lot stronger without the Euro or at least the Euro in a very different format.

The Ideal of European Integration

The post war development of Europe is one of humanity's great achievements. We went from a conflict perpetually at war, to a continent at peace (with the odd exception in the Balkans). The European Economic Community, for all its failings helped foster greater ideals of integration. With free trade throughout the European Union we benefited from a golden age of economic growth, low unemployment and prosperity. Whatever bureaucratic failings may occur in the EU, I will always remain a broad supporter of this ideal of bringing European countries together.

The Euro Is Not Aiding European Harmony and Prosperity.

The problem is that European leaders felt having a single currency (the Euro) was a natural extension of this ideal of economic and political integration. Southern European economies were particularly keen to gain the benefits of being tied to the German economy. (Italy was one of strongest supporters of Euro). Countries felt joining the Euro would be an easy ticket to low interest rates, low inflation and high economic growth. (in fact the opposite has occurred).

The EU were so keen to go ahead with the single currency that their own 'Maastricht Criteria' were pushed aside to let everyone join. (In 2000, the UK was actually one of few countries who met Maastricht Criteria, though we decided not to join). In the case of Greece the decision to ignore these criteria would prove most damaging.

The problem with the Euro is that it is fundamentally flawed, and because of these fundamental flaws it has an in built deflationary bias which is promoting low growth, high unemployment and increasing division between the different regions in the EU.

Fundamental Flaws of the Euro

  1. No Lender of Last Resort. This means liquidity crisis come quickly and with great force. It is why Greece, Ireland, Portugal, Italy, Spain (and more to come) have see such a devastating rise in borrowing costs. If the UK had been in the Euro, the same would have happened to us. Problems of Euro in recession
  2. Uncompetitive Countries. Countries in the south of Europe have seen a rise in inflation relative to Germany. This has left them uncompetitive, leading to lower exports and lower growth. But, because they are in the Euro, they can't devalue to restore competitiveness. They are left with sluggish growth.
  3. Austerity. The response to the EU debt crisis has been to push spending cuts on country. No matter how steep the spending cuts, these have singularly failed to reassure bond markets. Bond yields have continued to rise regardless. THe only thing spending cuts have achieved is to push the south of Europe into a potentially damaging recession, lower tax revenues and higher debt to GDP. IN response the European bureaucrats and leaders shout 'more austerity'. The outcome is unemployment, recession and greater disharmony.
  4. Not an Optimal Currency Area - geographical immobilities
  5. No real fiscal union - only grudging promises of help
More: Problems of the Euro.
  • The Germans don't want to bailout southern countries who have run up large budget deficits.
  • The south don't want to be stuck in a deflationary trap.
Both, are right. It shouldn't be like this. With the single currency and common monetary policy, we only have a recipe for falling living standards and increased social division. This doesn't help Europe. It is the Euro and the failings of the ECB which is threatening the stability of Europe.


1 comment:

Rudy Gevorgyan said...

The Union countries are the ones that use the Euro.
The zone ones are close trading partners. eg. Norway