Monday, March 23, 2009

Is the Euro Finished?

A version of this will appear shortly in the Winnipeg Free Press

A report released last week by the Bruges Group – a right leaning European think-tank – suggests that the current global financial crisis could see the end of the Euro – the single currency for sixteen of the European Union’s member States, including Italy, Spain, Portugal, France, the Netherlands and Germany.

Each of the eurozone economies are very different – they have different structures, a different mix of industries, unique histories and cultures and access to varied markets. Yet, the underlying assumption of the single currency is that a single interest rate and a single exchange rate against other currencies will work equally well for all member economies. In times like these, it clearly doesn’t. Industrial output in the eurozone is now the lowest it has been since records began. Unemployment is also growing fast in the eurozone countries

So much political capital was invested in securing the agreement to create the single currency that abandoning it now seems impossible, according to most analysts. Yet the challenge of saving the euro will come at a heavy price. Stronger economies amongst the sixteen – France, Netherlands and Germany - will have to bail out the weaker ones, driving up borrowing costs across the EU and slowing the pace of economic recovery. Exchange rates will likely remain weak for a considerable time, making import costs higher. Pressure for protectionism, already a reality in seventeen of the G20 nations according to the World Bank, will become more intense. Overall, it will mean that recovery from recession will be impaired.

This euro currency challenge comes at a tough time for many of the EU leaders. France is experiencing massive protests against President Sarkozy’s response to the recession. Angela Merkel, the German Chancellor, faces a tough election later this year and may have to choose between saving the Euro or retaining her position as Chancellor The Spanish Prime Minister, Jose Luis Rodriguez Zapatero, is facing rapidly rising unemployment and a threat to the stability of the country. BusinessEurope, a European employers' organisation, expects 4.5 million more European jobs to disappear this year - nearly two million of them in Spain alone.

Reacting to the developments, Jean –Claude Juncker, Prime Minister of Luxembourg and the leader of the euro group of finance ministers, said last week that “the credibility of monetary union is at stake.” He also revealed that the planned expansion of the euro had been “put on ice”.

The situation is affecting global financial markets. Central banks in Asia and the Middle East are rapidly reducing their exposure to the euro, though this has not stopped the single currency rising in value, notably against the pound. Figures from the European Central Bank (ECB), showing a collapse of investment from foreign buyers into euro-denominated assets that began in mid-2007 also show that the worlds financial markets are being more than cautious. Although there was a huge spike in the issue of euro-denominated bonds late last year, hardly any of the debt was bought by investors from outside the eurozone. What is more, governments are now issuing bonds and certificates seemingly faster than parking tickets in the busiest city.

The G20 summit begins on the 2nd if April. One can expect at least some temporary resolution of the eurozone challenge before then – IMF-like loans or “bail outs” to the most affected countries from the larger eurozone economies and relaxation of some of the European Central Bank restrictions on the debt levels held by countries and their economic policies. There will also be movements by each of the EU central banks to prop up the currency. But the emerging challenge from these issues is the difference between Europe and the US on the recession recovery strategy.

There is not much appetite for additional stimulus expenditure in Europe over and above the commitments already made. Instead, the focus, led by Angela Merkel of Germany, is on better regulation of the financial system. Despite the fact that the last G20 meeting committed to establishing a new regulatory framework last November, it is likely that this commitment will be recycled at the upcoming meeting. The US, in contrast, are likely to be pushing for additional stimulus, as President Obama seeks to expand the US economy and stimulate growth through debt based government spending.

Some commentators in Europe are already writing off the summit, with Britain’s The Spectator – one of the longest running right wing commentary magazines - calling for it to be cancelled. After all, the G20 summit, which will cost over $100 million, is basically a one day event. There will be no new world order, and the US preparations have been sidetracked by events in Washington. Political theatre will no doubt replace economic action, as the G20 leaders look towards the electorate and upcoming elections or votes in congress.

These issues reveal another. Europe is without a political leader. Former German Foreign Minister Joschka Fischer spoke twice in England last week. On both occasions he lamented the lack of focused political leadership within Europe which, he said, not only threatens the future of the Euro but also threatens the solidarity of Europe itself. “The absence of focused political leadership”, he said, has encouraged “the emergence and growth of popularist parties, often nationalistic, protectionist and against big government”.

The challenge of the Euro is a symbolic challenge for the nature of Europe itself. It was founded as a trade and economic cooperative and has struggled with its identity ever since. The current crisis highlights the question: “what is the European Union for”? The inability of Europe’s political leadership to answer this question in a convincing way tells us that the struggle for the over future of European Union will continue.

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