[Marxism] How long can the euro last? (Reformatted)

["Jack Cade" <jack.cade@xxxxxxxxxxxxxx>]

How long can the euro last?

After last week's no votes, economic woes could get even worse,
says
Heather Stewart

London Observer, Sunday 5 June

WHEN the people of Europe said 'non' and 'nee' to their new
constitution
last week, the euro bore the brunt of investors' anxiety ? and
some are
now beginning to wonder whether it is time to think the
unthinkable:
could governments stung by the public's rejection of the European
project press the self-destruct button, and blow the single
currency
apart?

Strains have been showing for some time. While some members of
the
currency zone, such as Ireland and Spain, are growing at a
healthy rate,
Italy and Holland are in recession, and France and Germany are
struggling with 10 per cent unemployment. The stability and
growth pact,
the agreement which was to prevent profligate governments going
on
inflationary spending sprees, has collapsed. And there is little
sign so
far of the economic 'convergence' that was meant to follow
monetary
union.

'In the Nineties the dominant theme was fiscal and political
convergence
on a grand scale. The reality has been that convergence hasn't
really
happened,' says Ian Stewart of Merrill Lynch. 'We are having
simultaneously boom and bust in housing markets; collapsing
exports in
Italy, booming exports in Germany. The zone remains very
diverse.' The
premium paid by recession-hit Italy on its government debt, over
the
rate paid by Germany, has doubled over the past two months, as
investors
have begun to see cracks in the euro-area.

Stewart believes the markets are simply waking up to the fact
that
divergences like these are inevitable in any single currency
zone; but
the poorest-performing states are having to grapple with
anti-euro
sentiment among workers feeling the full force of global
competition.

Rumours that national governments are considering their options
were
given fresh impetus last week by a story in German magazine Stern
that
finance minister Hans Eichel had discussed with Bundesbank boss
Axel
Weber the possibility of leaving the single currency. Both men
dismissed
the story as 'absurd', but it reinforced the jittery market mood
about
the health of the euro-project.

In the Netherlands, a downturn that began in 2001 after the
hi-tech
bubble burst is being blamed on the single currency. The Dutch
are
nostalgic for the days when the guilder was second only to the
Deutschmark in strength ? and frustrated that the eurozone's
spending
rules have been broken with impunity by France and Germany while
Amsterdam has stuck strictly to the pact.

'The public is rather hostile in the Netherlands about the euro,'
says
Prof Arij Lans Bovenberg of Tilberg University. 'We have been
through a
boom-bust cycle; we're currently in the bust.' He believes the
euro
itself is not to blame, and points the finger at government
policies for
fuelling the boom. But because the slide into recession followed
euro-entry, voters have often blamed monetary union. Their
argument has
been echoed by the director of the Dutch central bank, Jan
Hendrick
Brouwer, who told Amsterdam newspaper Het Parool in April that
his
calculations suggested the guilder was undervalued by 5 to 10 per
cent
against the Deutschmark when the two were locked into monetary
union.

Not everyone is unhappy: Spain, which has grown strongly in
recent
years, was first to vote 'si' to the constitution. Many Spaniards
saw
euro-membership as the final step in rejoining Europe, after many
years
of isolation under Franco. It also helps that joining has helped
tackle
inflation, and cut borrowing costs dramatically. 'When we entered
the
euro, our mortgage rates went down from 12 per cent to 2 or 3 per
cent,'
says Prof Juan José Dolado, a Madrid-based economist with the
Centre for
European Policy Research.

However, Spain and Ireland are lucky. There are enormous
differences
between the performance of individual member-countries while the
economy
of the eurozone as a whole is simply not growing very fast. It
expanded
at an anaemic rate of less than 2 per cent last year, and is
expected to
be weaker still in 2005. Meanwhile the Frankfurt-based European
Central
Bank, keen to establish a reputation for cracking down on
inflation, is
unwilling to cut rates to below their current 2 per cent to
kick-start
recovery.

There has long been a stand-off between the ECB and Europe's
capitals,
with Frankfurt calling for member-countries to tighten their
budgets and
reform labour markets, and governments demanding an interest rate
cut.

Danny Gabay, of Fathom Consulting, says 'storming the tower in
Frankfurt' and demanding an instant rate cut would certainly help
boost
economic growth. But until labour markets are made more flexible
so that
wages can do the job that interest rates and exchange rates once
did in
offsetting differences within the eurozone, growth is unlikely to
take
off. 'The answer to us is obvious: it's structural reform,' Gabay
says.
'But the French are digging a big hole and burying their heads in
it.'

That's partly because 'structural reform' of the kind economists
are
prescribing for France and Germany is very painful in the short
term ?
particularly when it's difficult for laid-off workers to move
freely
between countries when times get hard.

The euro's founders had hoped that the tensions created by
forging a
monetary union without political union would generate competition
between member-states. In the short term, though, the main
consequences
have been insecurity, joblessness and protectionism. With last
week's
no-votes putting the kibosh on economic reforms that might have
boosted
the eurozone's growth prospects, the pressures of co-existing
with one
interest rate and 12 different labour markets could become harder
and
harder to bear. Investors will inevitably be wondering how long
the
single currency will be able to take the strain. 



_______________________________________________
Marxism mailing list
Marxism@xxxxxxxxxxxxxxxxxxx
http://lists.econ.utah.edu/mailman/listinfo/marxism