The euro and the assault on European living standards

[Marvin Gandall <marvgandall@xxxxxxxxxx>]

A recent poll in Germany and statements by some far right Italian MP's
calling for a return to the mark and the lira respectively point to
increasing disatisfaction across Europe with the common currency - and, by
extension, with the larger movement towards unity, which the euro
represents. The relationship of the euro to European living standards has
now become more widely apparent. As the report by the NYT's Floyd Norris
notes, the euro was designed in no small measure to coerce or provide member
states with a pretext to slash their labour costs by depriving them of the
alternative of a competitive devaluation of their national currency. No
longer able to devalue to boost their trade performance, the French, German,
and Italian governments are now calling on the European Central Bank to
lower interest rates to give them relief from high levels of unemployment
and rising popular discontent. But the bank and other financial interests
want the states to press on with their assault on wage and layoff standards
as the primary means of making European producers more "competitive".

MG
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Europe's Latest Economic Scapegoat: The Euro
By FLOYD NORRIS
New York Times
June 9, 2005

Paris, June 8 - Is the euro in danger of dying before it reaches its seventh
birthday?

A suggestion by Italian cabinet ministers that the country hold a referendum
on withdrawing from the common currency drew denunciations from much of
Europe, as finance ministers met in Luxembourg this week. But the fact that
they were discussing the issue at all highlighted the notion that Europe's
common currency is taking part of the blame for the Continent's economic
woes.

Few, if any, think the euro will stop being the legal currency of much of
Europe. But after French and Dutch voters stunned the political
establishment by rejecting the proposed European constitution, those opposed
to other European institutions have been emboldened.

"It is just inconceivable that a country could envisage dropping out of the
euro," said Jean-Claude Juncker, the Luxembourg premier and current
president of the European Union. Hans Eichel, the German finance minister,
said the very idea of a country withdrawing was "nonsense," and Pedro
Solbes, the Spanish economy minister, called the common currency
"irreversible."

The row was started when two Italian cabinet ministers from the Northern
League, which is tenuously allied with Prime Minister Silvio Berlusconi,
suggested a referendum on returning to the lira. Mr. Berlusconi did not
endorse the idea, but neither did he denounce it. For the last year, he has
said the blame for many of Italy's economic woes lies with the European
Central Bank, for keeping interest rates too high and for allowing the euro
to gain against the dollar.

Nostalgia for national currencies has risen in the last year as European
unemployment has remained stubbornly high and growth has trailed that of the
United States and Asia. A poll taken late last month by the Forsa
organization for Stern magazine found 56 percent of Germans preferred to
return to the mark. The magazine said the margin of error was three
percentage points.

On one level, the euro has been a great success. Travel among the 12
countries that use it is far easier, and companies in those countries can
contract with others knowing there is no currency risk involved. The euro
was officially created at the beginning of 1999, but actual euro coins and
bills did not become legal currency until the beginning of 2002.

But economic integration of the euro zone has not come as rapidly as some
had hoped and that has created stresses. "You cannot succeed over any length
of time with one monetary policy and 12 fiscal policies," said Robert
Barbera, the chief economist of ITG Inc.

Europe tried to finesse that fact with an agreement that no government using
the euro would allow its budget deficit to exceed more than 3 percent of
gross domestic product, but in fact a number of countries have exceeded that
limit. Rather than levy fines, as was envisioned, the response thus far has
been to weaken the rule while encouraging countries to do better.

To the extent that Europe does pursue excessively easy fiscal policies, the
response would probably be a weakening of the currency, as has happened in
recent weeks. That has aroused concern in Europe even though some, including
Mr. Berlusconi, have been loudly calling for a weaker euro for many months.

When the euro was being designed, some economists forecast that European
countries would be forced to liberalize their economies because devaluation
within the euro zone would be impossible. In that context, liberalization
refers to making an economy more flexible, with workers easier to hire and
fire. Most European governments have tried to follow that prescription in
one way or another, but anger from voters and unions has forced retreats,
and in some countries liberalization has become very unpopular.

Before the euro was cast in stone, Italy periodically allowed its currency
to depreciate against the German mark. Such devaluations were often
turbulent, and were accompanied by pledges that it would not happen again.
But they served to allow the Italian economy to regain competitiveness with
other European economies where inflation was lower and productivity growth
greater. Since the euro was introduced, those trends have continued, but
devaluation is out of the question. Italy is now in recession.

Blaming Europe for national problems has happened in countries besides Italy
and pressure has been growing on the European Central Bank to lower its
short-term interest rate, now at 2 percent. Jean-Claude Trichet, the
president of the central bank, has backed away from statements ruling out a
rate cut, though he has not endorsed one.

Lower interest rates might help stimulate European economies, and a lower
euro could help exporters, but neither would address issues of Italy's
competitive position with other parts of Europe. Its position has also been
hurt because some of its traditional industries, like textiles, have been
damaged by Chinese competition.

It is not clear how Italy, or any other country in the euro, could withdraw
if it wished to do so. The Maastricht Treaty that established the currency
has no withdrawal provision.

If a country were to insist on withdrawing, presumably it could. But there
would be the risk of higher interest rates and a greater reluctance of
foreigners to invest. There would also be issues of whether debts contracted
in euros could be converted to national currencies that might then
depreciate against the euro.

For now, it is unlikely that talk of countries getting out of the euro will
advance very far. But the talk highlights that the financial unification of
Europe is a work in progress, one that has not advanced as rapidly as its
advocates expected.

"We are proceeding too slowly," Mr. Trichet said this week in Beijing, where
he was attending a conference of central bankers, "but we are proceeding
with unifying the market."