Why the Euro is wrong for Europe
Source Jim Devine
Date 06/10/06/16:49

Why the Euro is wrong for Europe, and America
By Gerald Friedman, CPE Staff Economist
October 6, 2006

I STILL HAVE some old French Francs floating around my desk drawers,
but their only value these days is as souvenirs, an English word of
French origin meaning a "token of remembrance," a "momento," "of
sentimental value." Instead of national currencies like the Franc,
since January 2002 a new currency has circulated in 12 European
countries (Austria, Belgium, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain).
(Three EU members, Denmark, Sweden, and the United Kingdom, remain
outside the Eurozone; the 10 new members admitted in May 2004 are all
scheduled to adopt the Euro in the next few years.)

Since the end of February 2002, the old national currencies have been
demonetized. But I am not alone in holding onto old Francs. Many of
my friends and neighbors in Paris this summer admitted holding onto
Francs, and people still give prices in Francs. I suspect that much
of the affection for the old currency reflects deep disappointment
with the Euro; and I fear that this is spreading into disenchantment
with the entire European project. There are many small problems with
the Euro: unattractive bills, a general shortage of small denomination
coins ('monnaie'), and a widespread perception that when prices were
converted from national currencies to the Euro the conversion rate was
rounded up to give a boost to profit margins. But the real problem is
that the Euro was sold to Europeans under false pretenses. It was
presented to the European public as a painless way to raise
productivity, reduce unemployment and promote growth. But it has done
none of these; on the contrary monetary integration has come with slow
growth and persistently high unemployment. Today, it appears that the
Euro's promises were never serious; instead, from the beginning, the
Euro was a weapon in an ongoing attack on the European welfare state.

Proponents promised that replacing national currencies with the Euro
would raise productivity by reducing the costs of changing money and
allowing businesses to market their goods more efficiently in foreign
countries. No one should be surprised that these specious promises
have not been realized. Money changing remains a large business in
European tourist destinations, with stands changing dollars, yen, and
other currencies into Euros instead of into Francs. The
money-changing business is declining, but this is due more to the ATM
and the use of credit cards than to the Euro. As for the trouble
businesses have with multiple currencies, the invention of the pocket
calculator and computer spreadsheet, not to mention the nearly
universal use of the United States dollar, has virtually eliminated
the cost of calculating foreign exchange rates as a business

While the Euro has done little, or nothing, to raise productivity, it
has had great economic significance. By preventing countries from
balancing their international accounts through changing currency
values, the Euro forces all of Europe to adopt a uniform [macro-]
economic policy regardless of different national needs. Worse, the
rules and treaties behind the Euro give this uniform policy a strong
deflationary bias, tying the hands of European governments and
preventing labor and socialist administrations from taking effective
action against rising unemployment and stagnant real wages. With
different currencies, countries could maintain different growth rates
while devaluing their currency to balance any differences in national
inflation rates. But countries with a common currency are driven to a
uniform growth rate because faster growth and a higher rate of
inflation will lead to an exodus of business and jobs to a country's
slower growing trading partners.

Logically, uniformity could come with all countries growing faster and
driving down their unemployment rates even at the risk of somewhat
more inflation. But the rules of the common currency were written to
prevent this. The 1992 Maastricht Treaty that established the
European Monetary Union leading to the Euro, established stringent
conditions for countries entering the monetary union including limits
on the use of fiscal stimulus to reduce unemployment and an explicit
requirement that monetary convergence be on the basis of lowering
inflation to a common, low level. Furthermore, authority over
monetary policy was given to an appointed and undemocratic
Frankfurt-based European Central Bank charged with holding down
inflation but with no official responsibility for reducing
unemployment or maintaining high growth rates.

And, through practice and design, the dominant role in Europe's new
uniform monetary policy went to the Continent's strongest economy,
Germany, a country that entered the Euro with an undervalued currency.
Now, Germany has a $200 billion trade surplus and its strong export
industries are pulling up the value of the Euro which has risen by 60%
against the dollar since 1998. Germany's bankers and wealthy cash
holders applaud the rising value of the Euro; but by lowering the cost
of imports and driving up the price paid for Europe's exports, the
rising Euro value has been a dead weight around the neck of European
industries, contributing to high unemployment throughout the Eurozone.

In the Euro we see the designs of a new economic order intended to
undo a century's social progress. Democratic politics has brought
into place welfare states that redistribute income from rich to poor,
from lucky to less fortunate. By cushioning citizens and workers from
economic misfortune, by limiting the burden of unemployment, welfare
policies have promoted democracy by limiting the power of wealth and
control over access to the means of production. From the beginning,
by promoting free trade ahead of political union, the European Common
Market was founded on a contrary principle to free market exchanges
from the 'burden' of state regulation. Now, the Euro brings
recession, unemployment and slow growth to a continent without
effective democratic political institutions able to regulate
continent-wide markets and monetary institutions. As a result,
instead of national or super-national Keynesian growth policies,
Euro-zone politicians can only try to alleviate unemployment by
driving down wages and reducing taxes in a beggar-thy-neighbor attempt
to attract the favor of bond markets and footloose capital.

The petty problems of the Euro will be fixed. More coins will be
minted and I suspect that artists, scientists, and humanitarians will
find their way onto the bills. Maybe they will even replace the silly
bridges pictured on the bills with examples of Europe's great
architecture. But the real problems will be harder to fix because
they require changing the very direction of European integration and
the Community's vision of freedom. So far, integration has been an
economic affair; in practice, it has been concerned with freeing
capital from local and state regulation rather than freeing citizens
by giving them the opportunity to regulate capital through democratic
action. On its current path, the Community has become a battering
ram, breaking down democratic regulation, and the dream of European
integration has been hijacked to become a weapon in the class struggle
against labor and the welfare state. Meaningful change will require
restoring democracy to Europe.

* Bernard Moss, Monetary Union in Crisis: The European Union as a
Neo-Liberal Construction (London, 2005).

* Joerq Bibow, "How the Maastricht Regime Fosters Divergence as Well
as Fragility," Levy Economics Institute of Bard College, Working Paper
460 (July 2006).

(c) 2006 Center for Popular Economics

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