English Pages, 12. 6. 2008
Ten years have passed since the founding of the European Central Bank but it seems as if it was yesterday. This was the last crucial step towards the introduction of the euro, a currency that was adopted by many European countries. With little nostalgia, these countries have forgotten their marks, francs, liras and pesetas.
A major celebration of this anniversary is being planned by ECB and I admit that there is a reason for it. The bank has chosen well-established methods of central banking and performed relatively well. It has quickly created a functioning monetary policy strategy. It has managed to keep inflation under control and by doing so has contributed to the recognition of the euro as a true international currency. In spite of all this, it is no great success. Why?
The question is whether the eurozone countries and their citizens have cause to celebrate. The answer is uncertain, given the zone’s sluggish economic growth, great growth differences among countries, and large differences in inflation, even though a single currency should have one rate.
In 1998 the eurozone was first of all a political project and it was generally believed that its economic underpinnings would be created at a later stage. A homogeneous economic entity was to be created, held together by a common currency. These hopes have not been fulfilled so far. I am not surprised. European politicians expected the euro to speed up economic growth in Europe, which lagged behind the rest of the world, but the currency’s adoption resulted in a further slowdown.
The eurozone has seen slower growth than the US and the European Union as a whole. Labour productivity growth has slowed and total factor productivity has dropped to a mere half of that in the two decades before the euro. It is clear that two groups of countries have emerged: one with a permanently high inflation; the other with a low one. From 2000 to 2006 inflation in six out of 12 eurozone countries exceeded the Maastricht criterion. A country with above-average inflation in a single exchange rate area gradually loses its competitive strength, and vice versa. Germany, for example, was pushed to a situation of deflation, which had a negative effect on its growth.
With the enlargement of the eurozone, inflation differences can become greater. In Slovenia, which entered the eurozone in January 2007, inflation rose from 1.6 per cent before accession to 5.7 per cent at the end of the first year of membership and to 6.9 per cent in March 2008. Today, it has the highest inflation rate in the eurozone. Experts agree that if Slovakia joins the eurozone it can also expect a significant rise in inflation. These pressures also emerge in cases where a country has pegged its currency to the euro at a fixed rate. That is, to a great extent, why the inflation rates of the Baltic countries have reached 12 per cent to 17.5 per cent. This cannot be explained only by the rise in prices of food and raw materials.
Besides the euro, another reason for unsatisfactory growth is economic policy in the EU countries and a reluctance to carry out necessary liberalisation and pro-market reforms. On the 10th anniversary of the euro we hear the usual calls for greater fiscal discipline, the perfection of the “stability and growth pact” and for decisive structural reforms. But these calls are not serious. They also ignore the fact that many of the eurozone’s problems are caused by the introduction of common currency in a disparate group of countries, each of which needs different interest and exchange rates.
The European Commission declares that the most important step towards improving the eurozone’s prosperity is closer political union. This should lead to more co-ordination of national economic policies and centrally prescribed structural reforms.
In relation to the outside world, the eurozone also needs to speak with one voice. Member countries should give up their representations in international institutions and their right to express their own view – on behalf of a single common representative of the eurozone.
Even those analysts whose assessments of the euro are entirely positive admit that in its first 10 years the eurozone did not go through any serious crisis that would put the currency to a test. Such a test is looming.
The world’s economic situation is changing. Large countries, such as China and India are seeking greater roles. International competition keeps escalating and demand for raw materials and food is rising. Brussels bureaucrats are not able to react to the changing conditions. They underestimate the struggle for raw materials and the pressures posed by the economic emancipation of underdeveloped countries. They blindly keep on making climate change their global priority.
If Europe does not wake up, it will face hard times. A common monetary policy will not help. Member countries already react differently to the appreciation of the euro against the dollar, the rising cost of energy, food or raw materials, and Asian competition.
We can expect politicians, eager to divert the disappointment of their citizens from their own doorsteps, to increase pressure on the ECB to adjust its monetary policy to the needs of the largest and most influential countries of the zone. Ten years after its founding, the ECB faces stronger pressures than ever.
In practice, the existence of euro has shown that forcing an economically disparate Europe into a homogeneous entity through a political decision is political engineering par excellence, far from beneficial for all countries concerned.
Václav Klaus, Financial Times, 12.6.2008
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