Whilst the fixed euro currency of 15 European nations may have overcome some of the recent short-term financial volatility and seems to have been judged as a little more superior to the ERM structure, a common sense British outlook of a Europe of sovereign states must be defended. Inherent to this vision is a Europe of nation states with their own respective unique currencies, national Treasuries and individual national banks. This must be defended during the existing economic crises precisely because a system of freely floating exchange rates (and not one fixed single currency) would have allowed differing regional critical impacts to be absorbed in different ways, determined accordingly by national economic actors in line with ‘actual’ national economic circumstances. That is to say, a Europe with freely floating exchange rates is reflexive and adaptable whereas a Europe with one fixed currency and exchange rate is not, and in its rigid harmonized system, draws Member States into volatile crisis upon crisis. The euro may well be riding high against the dollar and sterling but it is not at all the great single currency that many are claiming it to be.
We must be able to say with confidence that at least outside the eurozone, Britain can deal with the crisis with cheap sterling and Bank of England rate cuts. A European system of fully floating exchange rates could have provided for a flexible set of national solutions and the euro has, contrary to the prevailing analyses, legally and politically barred certain Member States in different regions from facing their own problems, from adapting and countering their own unique economic difficulties. They have been left widely exposed in the existing economic turmoil and there is not a thing they can do about it. Sarkozy, Zapatero and Berlusconi may well fight for the ECB to cut interest rates, and look toward job creation and economic growth, but the German-run ECB will ultimately win over: interest rates will need to remain high to battle its high inflation. There is no way out of that power struggle for the immediate future. That is the terms of absolute European monetary union.
Certainly the eurozone countries will claim that is more “convenient” for 15 countries to adopt a complete programme of economic and monetary union and not have to worry about these matters (i.e. exchange rates, interest rates and inflation for 15 different nations), particularly for Germany who owns Europe’s central bank and sets the monetary policy of Europe according to her wishes, but with existing national political tensions in the Union, coupled with rocketing inflation and economic failure, Europe again has little idea of how far this struggle will go.
Inflation in the 15 eurozone countries dropped to 3.3 per cent in April from a high of 3.6 per cent in March when consumer prices rose at the fastest rate on record in the bloc, according to a first estimate from the European Union's data agency, Eurostat. Confidence in the economy reached a low point in March, which analysts say had not been seen since 2005. The inflation rate remains well above the ECB’s 2 per cent ceiling, and seems unlikely to decrease given the exorbitant price of oil and food. As Eurostat maintains that the euro area’s annual inflation is expected to stand at 3.3 per cent in April 2008 – down from 3.6 per cent in March – the Commission may want to keep in mind the eurozone’s recent climactic achievement of unaffordable energy and food prices for consumers, sluggish economic growth and massive falls in consumer spending. The euro area is about to experience its worst disaster in this ten year experiment yet. Despite the pessimism of some Commission officials, and their adjustment for economic growth this year and next – it cut its growth projection for the eurozone, which it says would slow to 1.7 per cent this year and 1.5 per cent in 2009, down from 2.6 per cent in 2007 – they have still underestimated its economic failures.
The Member States of the Union, with their unique industries, economies and political complexities face different realities – a primary issue that neither the ECB nor the Commission will ever be able to deal with adequately. The recent economic data on inflation for each Member State illustrates the scale of the problem. Inside the eurozone of 15, Belgian inflation hit 4.39 per cent year on year in March, its highest since 1985; German inflation hit 3.3 per cent, matching a 12-year high reached in November; the Irish annual rate of inflation increased to 5 per cent in March; Spain moved to 4.6 per cent and Slovenia reached 6.6 per cent. Outside the eurozone, but within the European System of Central Banks (ESCB) of 27, there were phenomenally high rates in Latvia (16.6 per cent), Bulgaria (13.2 per cent) and Lithuania (11.4 per cent). Several of the Member States – including France, Italy and Spain – are simply preparing to internally buckle because their economic predicament is such that they are no longer able to assert real fiscal control over their economies. France’s Sarkozy is almost confirming this on daily basis, as France continues to struggle with the European binds on the control over her own economy.
With the divergent problems presented to the eurozone countries, their Governments will leave themselves dangerously harmonized within an anti-reflexive choice for economic policy or action. The monetary eurozone straitjacket, underpinned by the Stability and Growth Pact, will leave the countries unable to change their policies – which has already led both Italian PM, Silvio Berlusconi and French President, Nicolas Sarkozy, to give unpopular support for the politicization of the ECB, so that politicians can have greater say over controls as they face sluggish economic growth in the eurozone. A serious abuse of power, some might say. France and Italy, in short, are now arguing within European Union debates for the ECB to have larger say over economic governance issues in the eurozone as they face the consequences of their runaway economies. (Sarkozy hopes to make this a key issue for the French Presidency, which begins on 1 July). For example, manufacturing activity in the eurozone fell to its most sluggish pace in just under three years during April, as Italy and Spain recorded major contractions. Given that situation, what can Spain or Italy do to counter EU rules, if the ECB does not budge on inflation and if they are rammed within a uniform programme of fiscal and monetary union? They must wait, or get out.
The spiraling prices in the eurozone for fuels for transport, heating oil, milk, cheese, eggs, bread, cereal, education and fruit will mean that European consumers could be faced with an economy of unaffordable basic goods. For example, the OECD already reports that Belgium, Ireland and Greece posted increases in energy prices of around 20 per cent, whilst the US’s 17 per cent jump in energy prices was only the fourth highest. The different governments of the eurozone will in good time have left consumers and business stranded on the purchasing of these basic goods and it is difficult to see how it will causally make its way round such hurdles.
According to The Times, many economists have “scoffed” at the notion of one Israeli investor, Avi Tiomkin, as he forecast in Forbes his outlook on Spain:
“It is only a matter of time, probably less than three years, until the euro experiment meets its end … Countries like Spain and Italy will withdraw and return to their old currencies. … Despite core inflation in the euro zone of only 2.4 per cent and a slowing global economy, the Germans insist that the European Central Bank maintain a tight monetary policy. In direct opposition to Germany, the Latin bloc, joined by Ireland, wants the ECB to lower interest rates. For years, Spanish home-building and buying outstripped that of Germany, Italy and France combined. Now that the boom has turned to bust, the Spanish central bank cannot lower interest rates. Nor can the Treasury devalue the currency. … Bound to the euro, Spain can only complain to the European Central Bank, while watching its economy circle the drain.”
But was he wrong? I would like to think he was possibly ambitious in his predictions but not wrong in the core observation. The poor employment situation in Europe, which has bizarrely always been tolerated as somehow acceptable, will show no improvements in these conditions. Whilst the EU oddly boasts reduced unemployment, it has by its own records, insisted that 15.9 million men and women in the EU27, of which 10.9 million were in the eurozone, were unemployed in March 2008, noting the spiraling unemployment increases in Spain (moving from 8.1 per cent to 9.3 per cent) and Ireland (from 4.6 per cent to 5.6 per cent) over the year. Astonishingly, in March 2008, the youth unemployment rate (under-25s) was 14.5 per cent in the euro area and 14.6 per cent in the EU27, with massive unemployment levels reported in Greece and Italy, both at 21.8 per cent in the final quarter of 2007. In comparison, the unemployment UK rate has meanwhile hovered at around 5.2 per cent for the three months to February 2008. The eurozone is not only unaffordable, but it has not and will not work.
It is certain that a great loosening of ECB-EU conditions will need to be afforded to the eurozone 15 during the tough economic climate of 2008-2009. If no lifeline is offered, it will be not only be difficult to see how some of the states will make it out alive within a uniform monetary system, but how that uniform monetary system of the eurozone will indeed make it out alive, without its core members economically intact.