The Perils of the Euro

Exactly a month ago, amid much fanfare, the Euro was launched in earnest. Although the exchange rates of the 13 participating countries had been permanently pegged together the previous year, it took the introduction of standardized notes and coins to demonstrate the magnitude of the shift to a single European currency. Firework displays and the release of thousands of blue and gold balloons across the continent heralded the dawn of a new era for Europe.

Many experts had predicted serious problems as banks struggled to provide adequate supplies of the new currency and Europeans strained to cope with the challenging exchange rates. Instead, the transition progressed remarkably smoothly with only a few minor teething pains. The Euro is at last strengthening against other international currencies and leaders across the continent are already hailing it as a great success. Certainly, its introduction has significantly benefited tourists. With their trusty crisp blue bills travellers can now journey from Athens to Amsterdam without a thought about currency exchanges and can comfortably visit Rome without possessing an uncanny ability to divide by 70,000.

Nonetheless, the prospects for both the Euro and the residents of “Euroland” are rather less rosy than political leaders would have us believe. The struggle to set appropriate interest rates across an entire continent with extraordinarily divergent economic conditions may well prove to be an insurmountable challenge. The notion that a single interest rate could be appropriate for both Germany, which finds itself mired in a deep recession, and an Irish economy that seems on the verge of overheating is fundamentally naive. The choice of which countries’ economies to support is a daunting and unrewarding one for the unelected bureaucrats who control the European Central Bank under Gov. Wim Duisenberg. Indeed, he has already been styled “Dim Wim” by the British tabloids for his frequent lapses in judgement. The inevitable consequences of partial economic integration for vast swathes of Europe seem to be either spiralling inflation or ballooning unemployment.

The undaunted supporters of the Euro point to America as an example of how a single currency can span thousands of miles and effectively bolster agriculture and industry, town and country. Even if one accepts this simplistic assertion in its entirety, its proponents have failed to understand the significance of the fact that the United States is one country, whose residents are generally linked by a universal language, heritage and culture. “Euroland” has no such common identity; it does not even have a proper name.

The United Sates is also bound together by a federal tax code, something that “Euroland” decisively lacks. Interest rates have profoundly different effects depending on the tax rates in the areas where they apply. This has led Romano Prodi, the President of the European Union, to complain that as long as the EU does not have a standardized tax policy it will be “like a soldier trying to march with a ball and chain around one leg.” Joschka Fischer, the German Foreign Minister was rather more revealing when he said that the launch of the Euro was “a profoundly political act,” designed to spur Europe on to “put into place the final brick in the building of European integration.”

The Euro, as few leaders now deny, was a political and not an economic creation. A Federal Europe may still be a long way off but there now exists on the continent a strong belief that it is ultimately inevitable. The pitfalls inherent in a powerful European super-state, united by neither language nor culture, are clear for all to see. Yet, no one can deny that the Euro has been launched with political goals in mind, as well as, and perhaps instead, of economic ones. Those very same blue bills that seem so helpful to tourists may yet threaten the economic stability and political sovereignty of European states.