The Euro is killing Europe, says a Fellow of All Souls.
“If the euro is eventually abandoned, historians 50 years from now will wonder how it ever came to be introduced in the first place,” says Kevin O’Rourke, Chichele Professor of Economic History at All Souls College, Oxford.
One measure of the failure of the Euro is that the Eurozone GDP is still below pre-2008 levels, while USA has substantially grown GDP since 2008.
“The euro area economy is in a terrible mess,” says O’Rourke, “in December 2013 euro area GDP was still 3% lower than in the first quarter of 2008, in stark contrast with the United States, where GDP was 6% higher.”
The individual horror stories are:
“GDP was 8% below its pre-crisis level in Ireland, 9% below in Italy, and 12% below in Greece,” adds O’Rourke, “Euro area unemployment exceeds 12%—and is about 16% in Portugal, 17% in Cyprus, and 27% in Spain and Greece.
And the consequence is tragedy: “Young Irish workers emigrate to Australia or Canada, the Portuguese to Angola or Brazil,” says O’Rourke.
The shocking thing is that the Europeans are so used to this mess that they’re no longer shocked by it.
The faults of the euro are:
. the area it covers is too large and too diverse;
. the safety valve of labour movement from bust to boom regions doesn’t work;
. the need for periodic exchange rate adjustments is outside the ECB’s power to effect;
. there’s no mechanism for transferring resources to distressed regions.
O’Rourke instances: “By 1998 Ireland was experiencing an unprecedented boom, and house prices were rising rapidly. Higher interest rates were warranted, but when Ireland joined the currency union in January 1999 the central bank discount rate was lowered from 6.75 % in the middle of 1998 to just 3.5 % a year later. With the Irish party well under way the new ECB was busily adding liquor to the punch bowl.”
The standard prescription to the Euro-horror is a more unified, dirigiste, Europe with centralised institutions.
But O’Rourke says this approach delivers horrible results for small countries because “management since 2010 has been shockingly poor, which raises the question of whether it is sensible for any country, especially a small one, to place itself at the mercy of decision makers in Brussels, Frankfurt, or Berlin.”
“It is a question of outright incompetence,” reckons O’Rourke, instancing the Cyprus debacle and ECB interest rate hikes of 2011.
This incompetence threatens to ruin the whole European integration project which has brought a “golden age” to Europeans in terms of freedom to study, work, and retire abroad.
“The EMU in its present form threatens the entire project,” says O’Rourke.
With a flaky system and incompetent central bank, O’Rourke reckons the Eurozone has two choices:
“Jump forward to a federal political Europe, or return to a European Union without a single currency and let individual countries decide for themselves. The latter option will require capital controls, default in several countries, measures to deal with the ensuing financial crisis, and agreement about how to deal with legacy debt and legacy contracts.”