Friday, February 07, 2003
A bad year for the euro
Posted by David Smith at 08:32 PM
Category: David Smith' s magazine articles

It seems like a long time ago now but at the start of last year there was a lot of excitement about the euro. The changeover from national currencies to euro notes and coins – three years after the single currency came into being as an electronic currency – created a real buzz.

Against predictions that it would cause problems that would put Britain’s switch to decimal coinage three decades ago in the shade, the changeover went very smoothly. There were no huge heists by a new breed of euro criminal, who it was feared would take advantage of the massive amount of cash on Europe’s roads in the run-up to January 1. There were a few isolated examples of unsuspecting people being passed off with the European equivalent of monopoly money, and there were many complaints about retailers profiteering from the switch by marking up prices.

Overall, though, it went incredibly smoothly. Anybody who has travelled to Europe in the past year may have experienced what I have, that it looks as though the euro has always been there. National currencies have gone, and they are quickly being forgotten. There was even, as people in Britain watched the changeover from a distance, a brief flurry of support for our membership of the single currency. It appeared we were missing out. Mind you, predictions that we would all be soon happily using euro notes and coin in our local branch of Marks & Spencer also proved to be wide of the mark. Retailers say that euro use in the UK is minimal. People who return from holiday with spare euros either keep them for their next trip or convert them back to sterling.

If the euro changeover was a big logistical success, that is more than can be said for the European economy. Indeed, far from gaining a new impetus from the formal introduction of the euro, Europe seems to have sunk further into the economic morass. Last year, while the American economy grew by about 2.5% (and remember it is recovering from recession), and Britain by about 1.75%, the euro zone managed at best 1%.

For some countries within the euro area, the picture is even gloomier, most notably its biggest economy. The German economy struggled to grow by 0.5% in 2002 and is likely to disappoint again this year.

Nor is the gloom confined to the short term, according to economists. They see barely any improvement for the next couple of years, and continue to expect euro zone growth to lag behind America and Britain.

Slow growth is not Europe’s only problem. When the euro was established its key institution was the European Central Bank (ECB), based in Frankfurt. The other was the so-called Stability and Growth Pact, set up on the insistence of Germany, which requires member countries to keep their budget deficits below 3% of gross domestic product in normal circumstances. Germany was worried that countries which placed a lower priority on fiscal rectitude (Italy was the usual example) would wreck the system.

As it is, embarrassingly, Germany has fallen foul of the pact, with a budget deficit over the 3% limit this year, and the possibility of fines if it does not take measures to correct the problem. France is also close to breaking the rules, although its government has said that election promises to cut taxes are more important than sticking to the pact, and it wants defence spending to be excluded from the sums. Even Romano Prodi, president of the European Commission, has described the pact as “stupid”. In short, it is a bit of a mess.

Europe’s travails are obviously very important for Britain. The economies of the euro zone are our major customers and competitors. Indeed, with domestic demand weak, the only thing the euro countries seem to have achieved a degree of success at is exporting, because of the weakness of the currency.

The problems are also important because of the impending UK decision on euro entry. Pro-euro voices in government had hoped for two things by now. One was that the European economy would be showing both dynamism and stamina. It may have been a case of the tortoise and the hare, but the hope was that the European tortoise would be doing well in comparison with America. That, plainly, is not happening.

The other problem is that, to join the euro, we would not only have to swap the Bank of England for the ECB but we would also have to accept the Stability Pact instead of Gordon Brown’s own fiscal rules. That would be a very poor swap – at present the British versions are working better in both cases. And it is hard to see a government that designed its own economic framework exchanging it for an inferior model.

The euro is alive and kicking. But Europe’s woes mean Britain won’t be joining it for some time.

From Industry magazine, February 2003

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