Euro’s deluded alchemists were chasing fool’s gold all along

Allister Heath
WHAT is most upsetting about the Eurozone project is that it was based on a giant lie, one all too familiar in other contexts across the wealthy Western world. Europeans were told that they would be able to stay rich without having to work harder or change their ways: the single currency was meant to be a way by which cosseted, social democratic West Europeans would be able to protect themselves from hard-working emerging nations in Asia. The euro would serve as monetary alchemy to ensure Europeans kept their privileges: adopt it, and you would gain cheaper money, economic credibility and a supposedly massive windfall gain from the end of transaction costs and exchange rate volatility. That, at least, was what the propagandists promised would happen.

There were other arguments too, designed by power-crazed European elites and their paid intellectuals to appeal to national sensibilities: the French were taken in by the claim that the euro would rival the dollar and allow the EU to increase its geopolitical strength; the Germans were told the euro was a way to lock in low inflation and peace; the Brits that it was more efficient to have a single currency and that it would promote free trade. Not only was this rubbish – it was dangerous rubbish which accelerated Europe’s decline, threatening trade and doing nothing to save unaffordable welfare states.

The poorest countries are those that are now suffering the most from the delusion of their political leaders. Yesterday, Cyprus became the fifth country to beg for a bailout. Spain officially made its own official request for one, while 28 Spanish banks were downgraded by Moody’s. The Greek finance minister resigned even before he was appointed for health reasons, in another bitter blow for that country’s fragile coalition. Ian Stewart, Deloitte’s chief economist, has listed some of the factors that have turned a bureaucratic dream into a nightmare for ordinary people. The World Economic Forum’s competitiveness league table of 146 economies shows that the Eurozone includes some of the world’s best and worst economies. Three Eurozone nations are in the top ten: Finland (ranked fourth), Germany (which is sixth) and the Netherlands (seventh). Italy and Spain come in 36th and 43rd, while Greece is 90th, a far worse ranking than Russia, Albania or Rwanda. It is laughable that anybody thought that such divergent economies could be artificially glued together by a single currency – the once widely believed postulate that a single currency would make countries more similar over time has been proved to be nonsensical. Since 2000, German labour costs have risen 4 per cent – but they are up by almost 40 per cent in Ireland and Italy, close to 50 per cent in Portugal and Spain and by 90 per cent in Greece. The weakest countries handed themselves the biggest pay rises – it was total madness. Equally ridiculous were the consequences of one size fits all interest rates, fuelling bubbles in (usually poorer) countries with higher inflation and hence lower real rates: in the decade to 2007, Irish house prices almost quadrupled; Spanish house prices almost tripled; German house prices stagnated. Debt as a share of GDP in Italy, Ireland and Greece is two to three times higher than in Germany or the Netherlands.

The last statistic is perhaps the most telling: €100 invested in German equities in late 2009 is worth €114 today. The same investment in Greek shares is worth €26. The euro is a paper currency – but it has turned out to be the closest thing to fool’s gold we have seen in a very long time.
Follow me on Twitter: @allisterheath