We few who wrote and spoke strongly against the Euro in the 1990s did so because we thought it could not work. We thought it would make people poorer, destroying jobs and output.
In the two books I wrote I stressed
1. They wanted countries to join which were nowhere near ready to join on their own sensible criteria. The high borrowing, inflation and devaluation prone countries were not compatible with Germany.
2. The Euro area authorities had insufficient political control over spending, tax and borrowing when they needed to stop countries free riding by borrowing too much.
3. They would find out that belonging to a single currency meant they were sharing the bank account with the neighbours. It implied the neighbours would pick up excessive bills. The neighbours would be dragged into paying more tax and sending more transfer payments to the weaker parts of the union.
So it is proving. Yesterday Mr Barroso helped trigger a world market crisis by saying the contagion from Greece, Portugal, Ireland and Cyprus was now spreading to Italy and Spain. Markets had been warning this could happen. It was altogether more serious when Mr Barroso himself said it is happening. Mr Trichet at the European Central Bank followed up by saying the Bank is in the business of buying bad bonds from stressed countries. That led people to ask why were the bonds still so weak, and how much buying could the Bank plausibly do?
Why did two such senior Euro figures make such unhelpful statements? In the case of Mr Barroso it may be that he was so concentrating on the audience of the member states that he forgot the impact his words could have on everyone else. Or it is possible that he wanted such an impact, because he is trying to get the member states to do something when they would rather forget the problems between meetings. Mr Barroso wants the EU states to complete the ratification of new rules for the bail out funds, and wants the Euro area to intervene more rapidly and with convincing sums of money behind it. Mrs Merkel’s people expressed their displeasure at Mr Barroso re-opening this issue.
Mr Trichet may simply have run out of any answers which could reassure investors. He would be damned if he said he was not going to intervene, and damned if he said he would. If he ruled out intervention it was a further sign that Euroland was not yet grown up, that it did not yet recognise the need to restore some balance to its troubled debt markets. If he said he would intervene it highlighted the lack of financial firepower of the zone to sort out Italy and Spain on top of the four countries already recognised as debtors of the system.
So what are the options from here? Each time we review them there is a predictably bigger mess to sort out.
I still advise the Eurozone to undergo an orderly break up.It is the least bad option. If they had pushed Greece and Portugal out a year ago they might have been able to contain the pressures. Now it is more difficult to keep Spain and Italy in.
They of course will not want to do that. They are more likely to move more rapdily towards a stronger European economic government. That is probably why Mr Barroso said and wrote what he did this week.
It is getting a bit late for that. Such a Euro sovereign will need to impose credible limits on how much member states can spend and borrow in the common currency immediately. It will need to work with an active European Central Bank, buying in debt of the weak states, issuing its own Euro debts, and printing more Euros to meet obligations and inflate away some of the liabilities. It will have to follow something more like the US policy.
This US policy itself is not proving to be a huge success, but it is the current Establishment orthodoxy.
How likely is all this? My guess is Euroland will do too little too late again. The main politicians and Parliaments are all on holiday. Mr Barroso will find it difficult to get them assembled and to persuade them to take action. As the full costs of keeping this system afloat are revealed Germany will find it more difficult to sell it to the German people. The weak countries have to be made more credit worthy. That means the strong countries have to subsidise them one way or another. That in turn means the strong countries have to become less credit worthy. There may be limits to how far public opinion in the stronger countries will allow that to happen.