Even before the recent well publicised economic difficulties experienced by some members of the eurozone – in fact, since it was first launched as a currency – questions had been raised about the long term viability of the euro.
In 2005 the US economist Milton Friedman warned: “The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states. There have been unions based on gold or silver, but not on fiat money – money tempted to inflate – put out by politically independent entities.”
Whether you agree with all Friedman’s monetarist views, he was certainly right to highlight the apparent oddness of imposing a common currency on those countries who opted for joining the EU for its many benefits: countries with very different cultures, political systems and levels of economic development. How could the euro have the same value in each of those member states and how could it remain constant when each of those states was, and is, responsible for its own economy and self interest, but without the ability to take corrective action when troubles arise: for instance, through devaluation of its currency in relation to its neighbours?
So why have so many countries opted to join the eurozone? The answer lies, to a very large extent, in the many benefits that the eurozone presents to its members – and the breaking down of barriers to – and complications of – international trade are undoubtedly high on the list: no more worries about fluctuations in the exchange rate that might eat into the value of a sale, simplified billing, price transparency and competitive pricing for the potential purchaser. And the EU’s convergence criteria ensured that those bidding to join whip their economies into shape beforehand – although, as we’ve seen recently, some member countries have ‘let themselves go’ a little since the honeymoon.
The economic problems of those struggling member states serve to highlight the main issue concerning all the member states, because all those states are affected, as the value of the euro drops against other currencies, and tough decisions have to be made about effectively bailing out the ailing members. Opponents of the euro jump on this as a reason for it to be scrapped and for members to revert to their former currencies. But those same opponents have been opposing the euro – and predicting its downfall – for many years, and still it survives, albeit largely due to political will. Why? The easing of trade between member states must be the prime reason, as must the relative stability provided by a single currency when elsewhere capital flows lead to extreme currency movements that can seriously upset trading patterns. Even the UK, as an EU member but outside the ‘euro zone’, feels the pinch when the GBP/EUR exchange rate moves in the wrong direction.
A gauge of whether the euro will survive may be to imagine what trade throughout Europe would be like if each member state reverted to its former currency. The eye-watering cost of doing so apart, the immediate outcome would be the return of all those impediments to open trade, touched on earlier and the frustrations they would bring – not least, unclear price comparisons between competing suppliers, increased chances of adverse exchange rate fluctuations between contract and payment and more restrictions on the transfer of goods across borders of the ex-eurozone states. All in all this could result in a reduction in international trade if buyers revert to the easy option of domestic trade.
The euro is essentially the product of an idea – and an ideal. The ideal that, among other things, opens up new opportunities for successful international trade across Europe. Even if, in the longer term, the EU and its politicians have to find new ways to prevent member states from getting into financial trouble, whatever that takes, they – and we – should always keep this ideal in mind, as it surely provides the raison d’etre of the euro. And that is what will keep the euro alive.
Peter Ingenlath is Vice Chairman and Chief Risk Officer at Atradius