The Euro, an illusory shield against crisis?

Most political leaders of euro-zone countries make it sound as though the single currency has shown its capacity to play a protective role as the financial crisis sweeps across the Old Continent. So much so that today, even the staunchest of the Euro-sceptics (the British, Icelanders, Swedes, or Danes) are supposed to have suddenly realized the advantages of joining the euro...

The claim was made recently by Joaquim Almunia, European commissioner for economic and monetary affairs. The European leader's statement actually betrays a growing concern in the face of signals showing increasing divergences between the different regions or countries of the euro zone. These divergences might eventually lead some countries to consider opting out of the single currency.

The crisis shows up the very serious defects in the original conception of the euro. Entirely obsessed as they were with the stability criteria put forward by financial markets, those that championed its creation in 1999 were aiming first at a "strong euro" in the hope of luring as much capital as possible to the European market. Hence the curb on public spending (with the Maastricht treaty), and the pressure on wages through the deregulation of labour markets that diminished labour's negotiating power. "The euro has brought war over exchange rates to an end, but it has exacerbated competition over prices," rightly claimed Jean-Paul Fitoussi, president of the Observatoire français des conjonctures économiques (French Observatory of the overall state of the economy).

Today, the deepening crisis and the effect of the competition between states sinking deeper and deeper into debt have the additional effect (a refinement on the earlier stages) of bringing the pressure of competition to bear on the States' capacity to meet their debts (in treasury bonds). Indeed, if euro-zone countries are united by the single currency and the European Central Bank, the rates at which they get loans and the conditions attached to these loans vary from one country to the next. Before the crisis, these variations remained quite limited. But with the plunge into recession, and the gigantic assistance granted by the various states through bank bail-outs or economic stimulus plans, this is no longer true.

Spain and Ireland, for instance, which, until a short time ago, were still praised as models of economic success by pro-marketers in Brussels and elsewhere, are now going through a period of fierce turbulence. As a result, they are at a disadvantage on financial markets and find it difficult to raise money. Sovereign loans in the euro zone consequently tend to be widely spread. The risk premiums demanded from the frailest countries are soaring, unlike those demanded of Germany, which is still considered an exemplary borrower. The bench-mark rate for German (Bund) loans over ten years stood in early February at 2.98%, much lower than that of France (3.50%), or of Spain (4.13%), or, above all, of Greece (5.47%). The over-rated rating agencies were not slow in down-grading Madrid and Athens. Downgrading a state amounts to casting suspicion on its ability to pay back its debts.

In such circumstances, some countries that are strangled by the service of an increasingly heavy debt might be tempted simply to leave the euro ship. To ease the stranglehold, they might try devaluing their restored national currency as a last resort, in order to boost their exports. This prospect has made the fortune of the managers of the Intrade site where, for the last few months, it has been possible to bet on one or several of the sixteen euro-zone countries opting out of the euro. The contract expires at the end of 2010.

The original article "L'euro, un bouclier en carton-pâte?" appeared in the French progressive daily L'Humanité on 5th February. To read more translations from l'Humanité, go the website l'Humanité-in-English