Inadequacies of the euro are exposed
Back in the 1990s — when the project was being pushed through by the political elites in Europe — including an incredibly europhilic political system in this country, the basic structures that needed to be put in place to ensure something resembling an optimum currency area were ignored.
The failure to put in place mechanisms to deal with failing banks; the failure to put in place a system of providing fiscal assistance to countries struck by an asymmetric economic shock, which is a shock that is unique to a particular country or region; and the failure to put in place a proper system of fiscal and general economic governance and surveillance to ensure that countries behaved prudently and properly, are glaring examples of failure, but there are many others.
When the Stability and Growth Pact was agreed in Dublin Castle, there was massive gloating and triumphalism from the government of the time, but it has turned out to be an abject failure. As far as fiscal rules go, these did not add up to very much and seriously lacked a political enforcement system.
The problems across the eurozone, but particularly in Ireland and Greece in recent times, are examples of the results of failing to put the proper structures in place when the single currency project was being constructed.
It is easy to apportion blame at this juncture, but of course the reality is that to create a proper optimum currency area, a high level of political union would have been required.
However, there was then and there still is absolutely no desire across the union to accept the loss of political sovereignty necessary to make the unprecedented and difficult experiment work.
If an economic and monetary union of a large number of economically and politically diverse countries is to work, then serious structures need to be put in place and countries have to behave in a most disciplined way. This would all require a dramatic ceding of political control to the centre, but the appetite for this is virtually non-existent.
Hence, if EMU is to persist as a concept, there will be many more periods of volatility and uncertainty in the future.
In the past few weeks we have got clear examples of just how the failures in the architecture of EMU have been manifested in Greece and Ireland.
The Greek situation shows clearly that Greece should never have been allowed join the euro at its inception. It was a victory for politics over economics. Greece fudged its numbers to qualify for membership and nothing much has changed subsequently. Clientelism and corruption still characterise the country and it is estimated that over €70bn in unpaid taxes are out there in the system. The structures of the economic, fiscal and political systems were hopeless and inadequate to deal with the strictures and disciplines inherent in an economic and monetary union.
The results have been disastrous, as demonstrated by a government debt to GDP ratio of 180%; an unemployment rate of 26% and an economy that has reduced in size by 25% since 2008.
For Greece this is totally unsustainable, but the political means of dealing with it domestically and at a eurozone level are hopelessly inadequate.
Here in Ireland over the past week we have seen two former finance ministers giving testimony to the banking inquiry. The key message that comes across is just how unsuitable policies towards taxation and government expenditure were to the cyclical position of the economy.
In the 2007 budget, the finance minister went for an increase of 11.5% in gross current expenditure in an economy that was still growing rapidly. This was fiscal madness, but it was an election year after all.
In a proper economic and monetary union, those governments would not have been permitted to pursue such kamikaze policies.
But such surveillance at the EU level is not likely to materialise, so inevitably similar mistakes at national level will be repeated.
Jim
Power
