Anatoly Kaletsky argues that the Euro is responsible for the breakdown in European integration:
These lessons are hugely relevant to Europe today. The euro is the essential cause of Europe’s “democratic deficit†because it prevents different countries adopting the variety of social and business models that voters demand. A currency is to national economic management what a border is to political sovereignty: with floating currencies each country can choose its own style of economic and social organisation; with fixed currencies they can’t.
If France or Italy wants a generous social safety net, it can keep its business costs down by devaluing its currency. Of course, devaluation may lower living standards for consumers, but if people want to pay this price to preserve their social traditions, that is what democracy is for. It is only when a country with high social costs loses control of its currency that the burden becomes intolerable, destroying jobs and decimating investment.
Kaletsky has a point in his argument. Germany, for example, traditionally had a loose monetary policy that encouraged the high rates of economic growth during the 1990s, making Germany the “strong man” of Europe. Since the Euro was adopted, Germany has seen its rates of economic growth decrease and its unemployment levels hit their highest rate since the end of the Second World War. The normal course of action in such an economic downturn would be to do what the United States did — cut interest rates and open up the monetary spigot.
Of course, the European Central Bank has been notoriously unwilling to do this. The Euro is currently overvalued, which only makes things worse for the EU as it raises the price of European goods abroad and makes American and Chinese imports cheaper domestically. Kaletsky argues that ECB head Jean-Claude Trichet should follow Britain’s “White Wednesday” policy and devalue the Euro while slashing interest rates to 1% or below.
In the short term, Trichet would be smart to follow Kaletsky’s advice. The Eurozone badly needs a shot of economic andrenaline, and lowered interest rates would be one very good way of stimulating the European economy.
But it won’t have quite the same rejuvenative effect that it did in the United States. In the US, our labor laws make it much easier for businesses to add and reduce their labor force. In Europe, it’s nearly impossible to get rid of a worker without going through an immense amount of hastle. Naturally, European companies aren’t particularly interested in taking on new workers if they can’t gurantee their ability to later shed weight during soft patches. Because of this, an injection of capital will help the European economy, but it won’t reduce Eurozone unemployment to a more sensible level.
Kaletsky notes that Europe wants to maintain its expensive social model. If that is there choice, it’s there choice. However, Europe is still trying to maintain the illusion that economic strength, EU expansion, and the European welfare state are all compatible, when all three of them are in great tension. Europe has to grow up and face the reality of their times if they’re to have a successful monetary and political union. A united Europe could be a significant force on the world stage or it could degenerate into a squabbling incoherent mess. With the ECB unwilling to cut rates and European governments unwilling to reform their individual economies, it appears that Europe is sadly heading for the latter.
