Europe cannot let irresponsible states undermine the currency union
IN THE period leading up to the establishment of the euro in 1998, European states contemplating joining this single currency went to considerable trouble to get their public finances in order.
EU inflation, which in the case of the foundation members of the euro zone had been running at more than 5 per cent a year in the decade prior to 1993, was also reduced to an average rate of less than 2 per cent.
In our own economy, inflation between 1993 and 1996 matched that reduced EC average annual rate – in Greece, Portugal, Italy and Spain higher rates still persisted in those years.
That generally strong pre-entry economic performance misled many people into assuming that the new euro zone would run smoothly. We did not pay enough attention to the persistence of higher inflation rates in southern Europe and in 1997 it certainly did not strike anyone here that the new Irish government elected in that year would over the first seven years of euro zone membership choose to inflate our economy by almost three times the average rate of inflation prevailing in the rest of the euro zone by 5.6 per cent a year as against 2 per cent a year.
Moreover, few people here appreciated just how vulnerable the whole euro zone would prove to be in the face of irresponsible national economic policymaking in even a small euro zone state.
Ireland may just succeed in retrieving its economic situation, albeit at a huge cost to our people, but it is not yet clear whether Greece will be able to do so, although its government is now committed to a very courageous course of action. And the euro zone would be in very grave difficulties if the economic rot were to spread from Greece to a large state such as Spain or Italy.
From this experience we should learn that a currency union can be vulnerable to policy errors in a very small part of its territory. Ireland has barely 1 per cent of the euro zone’s population and Greece barely 2 per cent – but we can now see that irresponsible behaviour by the governments of even such small parts of the territory of our monetary zone can put at risk the economy of the whole area.
Europe cannot afford to permit irresponsible member states to act in a way that may undermine the economies of all their partners. This means the economic policies of euro zone states need to be subjected to much tighter control at European level. However, just because many decades ago other western European states made the mistake of deciding to tax company profits heavily, we should not be obliged to follow that counter-productive practice.
That does not mean Ireland or Greece or any other country should have a right to mismanage the balancing of a national budget or fail to control inflation to a degree that could destabilise the whole monetary union.
The Stability and Growth Pact, negotiated in Dublin in the 1990s, has clearly been a failure and needs to be radically reviewed.
Unfortunately, we have had to learn this difficult lesson at the very time when the cohesion of the EU is already very weak.
This became abundantly evident last December when two key EU appointments created by the Lisbon Treaty were being made, a new post as chairman of the European Council and a new high representative for foreign affairs and security policy.
The latter job was intended to be filled by a major personality whose prestige and authority would enable him or her to formulate a common European approach to major foreign policy issues, and well placed to secure for that position the approval of heads of European governments – great as well as small.
The outcome of that December European Council discussion was the appointment of Baroness Ashton to this key post. By all accounts she is an able woman. But, far from being a heavyweight politician capable of formulating a common foreign policy and negotiating on equal terms with heads of government, she has no public profile, has never been elected to any political office, and has no record of experience in foreign policymaking.
Her appointment was a political deal to satisfy the egos of heads of several major European governments – and also, perhaps, to ensure no serious competition between the new high representative and president of the European Commission José Manuel Barroso.
This should not have happened. If the need to keep Britain engaged with Europe made it desirable that one of these two key posts be filled by somebody from that country, at least one well-qualified and heavyweight candidate would have been Chris Patten – but presumably he was ruled out as belonging to the wrong political party.
In a lively address to the Institute of International and European Affairs last Monday Prof Jolyon Howorth said the German press has invented a new word to encapsulate this debacle: Selbstverzwergung, which means “the determination to remain a dwarf”. The short-sightedness and small-mindedness of some of the current large state heads of government may have prejudiced, perhaps fatally, a unique opportunity for Europe to play a constructive role in the evolution of the balance of forces at global level.
The next 15 or 20 years will determine the future shape of our world. Thereafter Europe with a declining population will inevitably play a reduced role. This could have been Europe’s last opportunity to exert a positive influence on the global future.