The popular slogan “One size fits all” mostly sells shapeless clothes that anyone can wear. But with a few exceptions, these clothes do not fit anybody and do not give an elegant appearance. They are too loose for some people, but too tight for others.
The same goes for the euro. Crisis-related rescue packages contain all kinds of things, including fast euro adoption (proposed by the opposition ČSSD, as well as some economists from the government’s anti-crisis council NERV). But the crisis should rather serve as a warning against a rush into the eurozone.
Two old reasons
There are basically two pro-euro arguments that are repeated over and over again.
First: Our small, open country with its own currency is very vulnerable. Speculators can attack the crown anytime and play cat and mouse with it. That results in dangerous fluctuations. Just remember – the euro cost CZK 23 in August, now it costs CZK 29. We should be ready for CZK 32 within six months – at least Goldman Sachs analysts say that (but they also predicted in June that crude oil will sell at 200 dollars a barrel in six months).
Second: The eurozone is our main trading partner, and exports make three-quarters of our incomes. Unpredictable exchange rate swings therefore cause particularly tricky situations to Czech exporters.
Apart from the two rational economic arguments, there are political ones. But also symbolical and emotional ones – some perceive the euro as bearing the hallmark of worldwide reputation and higher civilization standards.
Easy come with the euro…
These arguments are nothing new, and the crisis did not bring any new ones either. By contrast, it revealed strong reasons why to be very cautious.
Ireland and Spain are eurozone countries facing the most serious economic problems: The bubbles have burst in their property sectors. Very low interest rates, maintained by the European Central Bank since it was established, fueled the huge property boom in these countries. The interest rates were tailored neither to the small go-getting Ireland nor to Spain experiencing the strongest economic boom since the fall of Franco.
The interest rates suited France and Germany. These countries did not experience a golden era in the past decade, their economic growth was weak and in particular – German prices grew at the slowest pace in the eurozone. Germany’s GDP grew by an average 1.5% a year in the past ten year, and France’s GDP by 2.1%. But Ireland’s GDP grew 6.1% and Spain’s 3.5%. (Similarly, inflation in Ireland and Spain was twice as high as in Germany.)
Low European rates allowed banks in Dublin and Madrid to offer irresistibly cheap mortgage loans. This is apparent along the coast between Biarritz and San Sebastian. On the French side are houses that have been built there gradually over decades. On the Spanish side, there were cranes and giant fast-built development areas.
… but now they have to pay
The property bubbles were not the only disadvantage of the euro. The overly low European interest rates were not able to curb the fast price growth during times of prosperity. Today, Ireland is a much more expensive country than Germany. Prices in Dublin are 25% above the EU average, prices in Germany are just 3% above the average.
But Ireland’s main business partner is Great Britain, whose pound has weakened considerably to the euro during the crisis. Irish goods were too expensive for London even before the crisis: British prices are about 15% lower. But cutting prices by devaluation is not possible in bad times because the currency is the euro.
The only way to reduce Irish prices rests in cutting wages. But such a measure is difficult to implemented even on the liberal islands where going on strike is not a common practice. Who would lower wages now that people are terrified by the crisis anyway and fear to spend their money? Such a move would just deepen the crisis in the Irish economy.
The price of political dreams
When the euro came into existence ten years ago, it was a political project. It was supposed to bring prosperity and stability.
But Europe has never been a perfect monetary area that the holder of the Nobel Prize for Economics, Robert Mundell, talks about. It is not even a close to it. Big differences remain in the economic performance, labour productivity, the flexibility of hiring and firing, and in inflation in individual countries, and what is important – the gaps are not narrowing.
David Marsh in his new book The Euro: The Politics of New Global Currency deals with how leading economists and central bankers warned politicians at the very start. Marsh presents a hundred interviews with the main players to show that the euro was built up on emissions, psychology and wishful thinking, not on economic advantages. But politicians swept objections under the carpet.
The euro definitely means certainty and comfort for exporters that are the driving force of the Czech economy. At least for a while. But the crises and bubbles that the euro can drag small economies into have much worse impacts that a decline of a couple of percent in profits of Czech industrialists.