The Euro Folly – the shattered dream of European Union
The dream of one European economy and polity seems
far-fetched now
Syed Mushtaque Ahmed
The Europeans had a dream! They wanted to form a monetary and political union so that centuries-old internecine wars would become just memories of a distant past and Europeans would march forward as a big United States of Europe. At the turn of the century, with the launching of euro and formation of European Monetary union, the dream was materialized and journey through the long, winding road to European monetary union was finally over. Or, at least it seemed so!
The seed of European Union (EU) was sown in the fertile land of Europe in the post-World War II era, as some west European countries, emerging from the ravages of the war, felt the need for economic cooperation and higher degree of economic and political integration. The signing of treaty of Rome on March 25, 1957, established the European Economic Community, and marked the beginning of an era that ultimately culminated in the formation European Monetary Union and launching of Euro in the 1990s. The original signatories of the treaty were: France, West Germany, Italy, the Netherlands, Belgium, and Luxembourg.
Buoyed by the success of the European Common Market (ECM), member countries pushed for further economic integration. Delors commission under the determined leadership of European Commission President Delores led to the signing of the Single European Act (SEA) in February 1986 and finally the Treaty of Maastricht in 1992, which laid the foundation for European monetary union. However, Maastricht treaty was more driven by geopolitical considerations than rational economic analysis.
Rapid changes in the political theater of Europe expedited the formation of the Union despite tremendous misgivings. The Gulf and the Balkan wars of the nineties and the fall of Berlin wall underscored the need for a common European military and security policy, in addition to deeper economic integration. German reunification, which sent a shock wave through European capitals, was perhaps the last proverbial straw that broke the camels back. The French government hurriedly lobbied the UK and other members to push through an economic union before the mighty Germans strike again, this time with their economic might! So the European capitals became active and late night sessions for a deal began. In the urgency of making a deal, was forgotten the problems of how a common currency will deal with economies which lie in different spectrum of economic and monetary developments. The European baby was thus delivered by an induced delivery instead of a natural process.
The euphoria did not last long! The global financial crisis provided the first litmus test for the stability of monetary union. The replacement of several currencies with one currency made the movement of funds between Eurozone nations easier and faster than before. Low interest rate and access to a very large pool of funds from the rich banks in the North proved to be a bad recipe in the untested financial markets of EU and created the mother of all binge spending for credit hungry neighbors in the south.
Soon it became clear that despite serious efforts in trying to achieve synchronization of major macroeconomic variables, Eurozone remained a tale of two economies; the prosperous nations in the north led by the industrial powerhouse, Germany and their southern neighbors commonly known as Portugal, Italy, Greece and Spain (PIGS). The financial crisis of 2007 exposed the fault lines in the economies of the euro-zone.
For years, German economy was running on four cylinders, cranking out output at a lower cost than its competitors, by virtue of relatively lower labor cost. This also resulted in an enormous trade surplus which put the country in a position of net lender to its neighbors in the Eurozone. On the other hand, countries in the southern euro-zone, were not fiscally as disciplined, engaging in profligate spending. While Greeces public spending was soaring, Portugal, Italy and Spain witnessed an increase in private spending. Despite an average annual growth rate of GDP by four percent, the public debt of Greece was rising every year and eventually, the country reached a point of an unsustainably high debt-GDP ratio. Greece had a budget deficit of 10.5 percent of GDP and a debt-GDP ratio of 145 percent in 2010.
The trade deficits of PIIGs countries were financed by German banks and investors eager to lend to them. Flow of easy money from countries in the north, might have helped PIGS economies in the short run, but may have dire consequences unless borrowed fud is used wisely on productive investments.
The policies of quantitative easing that were conducted in the US were adopted by the ECB on a larger scale. European Financial Stability Fund (EFSF) was created to help troubled banks and governments. Initial purchase of sovereign bonds of 440 billion euros was not enough. Bail-out money also came from IMF and central banks of other industrialized nations.
As EU was recovering from the shock of Greece, the British decided to leave the union in a referendum held last June. Brexit is perhaps the greatest existential threat for the European Union since its formation in 1990s. In recent years, it was the evolving Greek economic crisis that was first and foremost in the minds of EU policy makers and captured most of their energy. The possibility that Great Britain will exit EU has become the unkindest cut of all. In the wake of influx of waves after waves of immigrants, the anti-immigrant rhetoric in UK seems to merge with anti-EU rhetoric since UK was bound by treaty to take so many immigrants.
Europe is moving to the right as the backlash against immigration policy is rising and anti-Islamic sentiments are growing. The dream of one European economy and polity seems far-fetched now.
The writer is a Professor of Economics and Director of Bill Burgess Jr. Business Research Center at Cameron University, Lawton, Oklahoma, USA
