Europe faces its crucial dilemma
between solidarity and chaos
by David Marsh
Mon 24 May 2010
The dream of monetary union across Europe has turned into a nightmare. Led by France and Germany, European countries have decided to spend colossal sums of taxpayers’ money they cannot afford to heal mounting internal disparities they cannot conceal to shore up an edifice many believe cannot stand. On Monday, that skepticism briefly pulled the value of the euro down to a four-year low against the dollar.
After the birth of the euro in 1999, Wim Duisenberg, the first president of the European Central Bank, spent too much time playing golf in his first years in office -- and didn't do enough to force discipline on errant members of the single currency.
That's the plausible, yet somewhat unforgiving, view of former Dutch Prime Minister Ruud Lubbers, who along with President Francois Mitterrand, Chancellor Helmut Kohl and other past political leaders was one of the architects of the Maastricht Treaty in 1991 that laid down economic and monetary union in Europe.
Lubbers, a former ally of Britain's prime minister Margaret Thatcher and one of the few in Europe who held his own in political sparring with Helmut Kohl, has got a point.
In the crucial years of 1997 to 1998, before the decision on which countries would join monetary union, the Dutch were even more reluctant than the Germans to include the southern European states in the fixed currency system. Gerrit Zalm, the then-Dutch finance minister, was particularly critical of membership by the Italians, Portuguese and Spanish. His view was that such inflation- and devaluation-prone countries would quickly lose competitiveness and threaten the stability of EMU as a whole.
Yet in the end the European decided to go ahead with a broad-based monetary union comprising 11 countries, including the southern states.
A North-South separation, it was judged, would have gouged a painful hole in the ideal of European solidarity. More to the point, it would almost certainly have sparked large devaluations of the southern currencies, which would have adversely affected the export-oriented economies of the North. Greece was of course barely discussed at the time. Athens was allowed to join in 2001, after the first wave of 11 countries, on what now appears to have been an almost criminally over-generous interpretation of Greek economic figures.
And so it came to pass that Duisenberg, the Netherlands central bank chief, was given the prime ECB post. He was a representative of a small country that in terms of monetary stability was in some ways even more German than the Germans. But, according to the view of in-the-know observers such as Lubbers, he and the other central bankers who took up their positions in Frankfurt did not have the necessary tools to do their jobs properly.
Effective instruments to head off the growing balance of payment deficits in southern euro states were simply not available. In these countries, lower interest rates and higher exchange rates than would have arisen outside monetary union paved the way towards monetary and fiscal derailment.
Yet neither politicians nor the central bank had the power to give real teeth to the Stability and Growth Pact invented in the mid-1990s to try to combat budgetary imbalances. So Duisenberg, Europe's main monetary guardian, took his eye off the growing threat of eventual monetary problems - and instead devoted more time to the golf course.
This Dutch version of recent European monetary history has certain plausibility. The Dutch occupy a central position in monetary union. Even more than the Germans, the Netherlands has made use of the changing competitive landscape within EMU to expand their export markets within the currency bloc. That is a big reason why, in the five years 2005 to 2009, the Dutch current account surplus averaged 7.1% of GDP -- even more than the 6.1% in Germany.
These developments were not only predictable but also predicted.
As Chancellor Angela Merkel now says, the euro really is in danger. This state of affairs has been exacerbated by last week's ill-thought-out unilateral German decision to ban short selling of certain instruments such as naked CDS. In fact, the threat goes deeper still; we are dealing with a real clash of civilizations in Europe. Not only between the stability-orientated North and the more inflation-prone South, but also between countries and peoples with completely different sensibilities regarding the market and the public sector.
The clash will intensify well beyond the European Commission's "general mobilization" against speculators and the 750 billion-euro IMF/Europe aid package. The Europeans have to choose between solidarity and chaos. It is not yet clear which route they will take. Both directions involve enormous costs -- which will be driven up inexorably by any further inaction.
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