Politics muddies euro economics

It always sounded like a great idea. The bellicose continent of Europe which brought us two world wars in a little more than 30 years and plenty before united in a single entity called the European Union. At its heart is the Franco-German alliance, two countries that slugged it out three times between 1870 and 1945.

For all its weaknesses, the European Union can boast two great achievements: there has indeed been peace between its members (although, in truth, there’s no reason to believe that wouldn’t have been the case without the European Union), and it has created a single, liberal market between all 27 members with a strong framework for competition.

It has its problems, though. The euro is the triumph of politics over economics. A single currency should have been one of the final steps in establishing a United States of Europe. There has to be one fiscal policy, one monetary policy, and one system of economic governance to make a single currency work.

Instead, the Germans and the French decided that by establishing a single currency, they would force the euro economies to converge. In other words, they thought they could achieve economically what was hard to achieve politically.

They failed and the reason they failed was a lack of will throughout the Eurozone to meet the required fiscal and economic targets. Even the French and Germans themselves ignored the targets! They weren’t helped by the need to bail out their banks during the global financial crisis but the truth is even before the crisis hit, Eurozone countries to a greater or lesser extent showed scant regard for the virtues of fiscal discipline.

The future of the euro is now hanging in the balance. Greece will almost certainly default, and it’s questionable whether the contagion effect of that default will destroy the euro altogether. If it does, which is unlikely, the whole European project will be in jeopardy.

Alexander Downer was Australia’s longest-serving Minister for Foreign Affairs from 1996 to 2007. This is an extract from his article ‘The European Union’ in the latest issue of Policy magazine (Autumn).