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European malaise

Posted by Helen Tuesday, December 14, 2004

The latest person to complain about the strong euro and its effect on the euro zone’s economy is the French Prime Minister Jean-Pierre Raffarin. On the one hand, he said:

“A strong euro reduces the energy bill made out in dollars,”.
On the other hand:
“… it weighs on our exports and the euro zone’s economic growth. In France, as in the rest of the euro zone, we are not satisfied with the current situation.”
Well, I imagine not. With growth prediction down to just above 1 per cent and chronically high unemployment, such important achievements of the “European social model” that other countries are enjoined to follow, as compulsory paternity leave become unimportant. You do not paternity leave if you have no job. All the time will be spent with your family.

Yesterday’s International Herald Tribune reprinted an article from The New York Times by Mark Landler, its German correspondent. In it he examines the strange phenomenon of the European malaise. Having got their strong euro, a world currency, they remian sullen about the fact that it and their economic future remain hostage to American actions. And these, the European suspect, are going to be hostile to them. Actually, many European commentators acknowledge that American decisions about the dollar will be taken according to what is seen to be best for the United States, but somehow that does not seem right.

There is, for instance, the problem of the American deficit, which is not as much of a problems as some people make it out. The Austrian Finance Minister, Karl-Heinz Grasser, has complained about Europe having to
“… pay the bill for major imbalances in the world economy, especially the current-account deficit and the budget deficit in the United States.”
The trouble is, as the article points out, that it takes two to create an imbalance. What matters in the world economy now is the relationship between America and Asia. According to the historian Niall Ferguson:
“The Europeans are sitting there as a passive third-party in a great financial transaction between the United States and China.”
And if not China, then the rest of the vast Asian continent, many of whose countries are powering ahead and see no difficulty in exporting their goods to America and converting their money into Treasury securities. Far from making the EU into a strong player, the euro seems to have sidelined the relevant countries.

As Mark Landler points out, this powerlessness is an illusion. Much could be done. The European Central Bank could intervene in the foreign currency market or it could lower interest rates, instead of hanging on for grim death to its 18 month-old rate. Of course, moving the interest rate would probably hurt other countries in the euro zone but Mr Landler does not touch this aspect of the problem, concentrating on the travails of Germany and Europe in general.

Then there is the never quite materializing economic and social reform that is so vitally needed in west European countries.
“Looser money could pump up domestic consumption and help right the global imbalances. If the Dutch and the Germans were to adopt even a bit of the exuberal materialism of Americans, Europe would soak up a greater share of Chinese toys and Japanese stereo equipment.”
These are all fair points but they do not cover the ground adequately. It is not just lack of loose money that prevents trade but the endless anti-dumping regulations, health and safety regulations and all the other gumf that masquerades as protection of the customer but is, actually, simple protectionism.

The whole question of the euro is not really addressed either by Mark Landler or Niall Ferguson, both of whom seem to accept the notion of a Europe with one currency. The euro zone is not an optimal currency zone and the economic differences are too great to be overcome by monetary union. In fact, it is not a single economic area even allowing for the fact that these have great differences within them.

The euro was a politial decision and was greeted as the triumph of politics over economics. Unfortunately, as a certain British Prime Minister once said: “you can’t buck the market”. The political decision of one currency was not going to solve the many economic problems. And while it is not true that the euro has caused all these problems, it is true that having touted the currency as the solution for all ills, its proponents are faced with the dissatisfaction they themselves had created.

We have a single currency, say the people of the euro zone, and it is very strong. Now you tell us that it is too strong and that it will not deliver the many benefits you said it would. Enough to make anyone sullen.