On January 1, 2002, the European Union debuted an ambitious new currency to rival, and even surpass, the mighty U.S. Dollar. This new money, dubbed “the Euro”, replaced schillings, francs, guilders, marks and markkas, punts, lira, escudos, pesetas and drachmas, relegating these national currencies to extinction.
Nine years later, it appears that the Euro may be headed in the same direction.
What brought about the downfall of the world’s largest currency, imagined during the post-war years as a way to rival the dominant U.S. and Soviet economies? The answer is simple: while many European countries could agree on ways to combine a currency, they were far too different in cultural temperament to ever agree to a centralized economy. And it is a common economy, even more so than a common currency, which provides for economic power.
When the European Union first became a reality in the late 1960’s, there was great discussion regarding the benefits of monetary union (everyone using a single currency), and those of fiscal union (all countries sharing a unified budget and economy). Thirty years later, all they could agree upon was that monetary union made sense; fiscal union was a blunt non-starter. It was clear that German fiscal prudence would never catch on in the Greek and Italian free-wheeling economies, and that the French would never make any financial concessions to German interests. And that doesn’t even begin to take into consideration the historic enmity between Britain and Ireland. Still, by cooperating on money, the member countries saw themselves moving from international bit players to major movers in the world’s currency markets.
What didn’t disappear were the national habits of each participating country. The Maastricht Treaty of 1993 established the terms and conditions of the so-called “Euro-Zone”, instituting rigid criteria that had to be met before a country was eligible to convert to the new currency. To both join and remain, a country had to comply. Most met the criteria at first (although Greece’s accounting appears to have been creative from the start, and Great Britain and Denmark opted out), but staying on the straight and narrow has proven challenging ever since, though certain countries have been more challenged than others.
The Maastricht criteria, governing entrance and continuing membership, established the following:
• no member state could have inflation more than 1.5% points higher than the average of the three best performing EU member states;
• each member state’s annual government deficit could not exceed its gross domestic product (GDP) at the end of the preceding fiscal year by more than 3%;
• gross governmental debt could not exceed 60% of GDP at the end of the preceding fiscal year;
• applicant countries must not have devalued its currency for the two prior years, and should have joined the exchange-rate mechanism under the European Monetary system for that period; and
• long-term interest rates in member countries could not be more than 2% points higher than the average of the three lowest interest rate member states.
Historically, countries have managed to squeeze their budgets to meet the standard for entrance, but continuing compliance is often disregarded, with little or no consequence to the non-compliant member. Enforcement has been non-existent since expelling non-compliant countries would only weaken the Euro.
The 2007-2008 worldwide economic collapse made all compliance problems serious. As demand for goods dried up, real estate values plummeted, unemployment skyrocketed, and tax revenues tanked, disparities between well-run member states and more lackadaisical operators grew exponentially. Germany, for example, began austerity measures almost immediately, while Ireland opted to guarantee Irish real estate loans, Italy tried to borrow its way out of the crisis, and Greece illustrated its complete incompetence in tax collections.
Today, Maastricht is lying in shreds at the feet of Europe, and its reconstruction is not certain. With Greece, Ireland, Italy, Portugal and Spain teetering on the brink of default, uniformity of long-term interest rates between countries has vanished, national deficits in these troubled countries have exploded, and the percentages of national debt to their GDP has soared. The sole way out of the mess for these countries is to ask more prudent member states, who have already instituted draconian austerity measures, including pension cuts, social service cuts (such as health and education), higher taxes and increased retirement ages, to bail the profligates out. Slovakia and France have already begun bristling at the constant requests, and Germany won’t be far behind.
The length and final outcome of the European crisis remains uncertain. It is possible that a smaller Euro Zone may evolve without its non-compliant countries. Equally possible is that all members may revert back to their legacy currencies, consigning the Euro to museums housing Spanish doubloons and Roman denari. What seems unlikely is a belated attempt at fiscal union, with a single economy and a single policy. This would have been a reasonable way to float a single currency back in 2002, and it is still the only way that makes sense. Unfortunately, all the sense in the world will never get the Germans and the Greeks to see eye to eye.