- The Washington Times - Monday, June 20, 2005

History has shown that multinational monetary unions have had a tendency to break down. Frequently, a collapse of political resolve, which is needed to maintain a monetary union, has preceded the implosion of a union’s currency. When French and Dutch voters recently tossed Europe’s political future into disarray by rejecting the proposed European Union (EU) constitution, questions about the euro’s long-term viability arose.

The word “kaputt” appeared in the headline of a recent article in Germany’s respected Stern magazine questioning the euro’s future. Apart from the not-very-surprising report that 56 percent of Germans wanted the deutschmark to return, Stern also revealed that senior German policy-makers, including the finance minister, have recently met to review Germany’s options in the event the euro collapsed. That was news. Meanwhile, Italian Social Affairs Minister Roberto Maroni — admittedly a member of Northern League, which opposed the euro’s adoption — recommended that Italy re-introduce the lira.

The 340-page, micromanaging constitution, which would have formalized the political union of the 25-member EU, declares that “member states shall co-ordinate their economic policies within the Union.” It further stipulates that the EU’s council of ministers would establish “pecific provisions [that] shall apply to those member states [currently 12] whose currency is the euro.” However, if the EU constitution fails to be implemented, then the euro, which already is the world’s only currency that is signed by nobody, could be “officially branded as the first currency in history to be without a government, or at least a constitutional structure, to support it,” observes George Trefgarne of the London Daily Telegraph.

Euro defenders have reacted strongly. The Belgian central bank governor branded speculation about a euro crisis as “a science-fiction scenario.” European Central Bank President Jean-Claude Trichet called talk about the euro’s demise “totally absurd” and “complete nonsense.” Karl-Heinz Grasser, Austria’s finance minister, said it was “irresponsible” for the Italian minister to call for the lira’s return. Writing in the Wall Street Journal, Mr. Grasser rightly argued that “structural reforms are the way to bring higher growth in Europe.” However, in France, Germany and Italy — the three largest eurozone economies, which are afflicted by either double-digit structural unemployment rates and perennially slow growth (France and Germany) or recurring recessions and skyrocketing public debt (Italy) — there appears to be little appetite for structural reforms that would reduce their rising budget deficits and the welfare states they finance.

At a minimum, the French and Dutch votes have produced unavoidable uncertainty over the euro. OPEC and Asian central banks, which were likely to diversify their dollar-dominated portfolios by increasing their demand for euro-denominated securities, may have second thoughts if the EU constitution fails to be implemented. That could jeopardize the euro’s role as a reserve currency. However, over the medium term, say the next five to 10 years, countries that use the euro will likely increase rather than decrease, as Eastern European nations continue to seek membership in the euro club. But over the longer term, if the major eurozone nations fail to adopt the necessary structural reforms, the euro’s role as a reserve currency may be inconsequential, regardless of the fate of the EU constitution.


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