Feb 2010 03

timeo danaos et dona ferentes4

Is Greece set to unravel the Euro? The dynamics of that undynamic public administration look set to have a crucial impact, but not necessarily in the way people are expecting.

Successful currency zones operate where safety valves operate to take the strain that a floating exchange rate would normally channel. Having the same currency as your export partners obviously does not allow for your national currency to depreciate under the market’s direction, allowing for exports to become more competitive on an exchange level. So a Eurozone country that is heavily reliant on inter-Eurozone trade cannot benefit from an export-led drive from recession in the way that Britain’s has. Heaven help us indeed if we had joined the Euro under Blair after all.

Instead, countries have to rely on social or financial shifts. Consider the case of, say, Merseyside (as a ‘Woollyback’ by origin I feel safe raising the analogy). Imagine – it’s not hard to do – there is a period of regional decline due to a shift in national and global trade patterns. Liverpool is in the same currency area as London, and so cannot offset a local recession through a depreciation of its currency compared with the London Pound. The cost of making a product in the Wirral does not become comparatively cheaper once it is sent down the M6, because the currency rate is fixed.

However, in compensation, since Liverpool and London are in the same country, and the national government recognises that there is an economic and social crisis, the state transfers money from the central budget into the area to support development, encourage shifts in employment, and bear the brunt of high unemployment. That is the price and the benefit of accepting currency union, based on the geographical redistribution of the take from a common tax system.

The other main alternative is for people to move away and look for work in areas lacking the necessary workforce. This of course is easier in countries where there is a common language and a common culture – the United States is a classic example, with an extraordinarily high ratio of movements of people both infra- and inter-state every year.

The problem with Greece and the EU, however, is that these principles do not apply to the same extent. The ‘federal’ EU budget is a tiny fraction of the federal budget of the United States. Meanwhile, despite a burst of considerable migration during the accession of several Eastern European states to the EU, there does not seem to be the same level of work fluidity in the Greek marketplace and certainly nothing approaching North American levels.

Where does this leave the Euro today? The Commission has apparently already suggested that Athens will come under ‘special measures’. Why anyone should express surprise or outrage within the Eurozone is a mystery; such a development was always inevitable, and pointed out by critics even at the time. At some point, with divergent economies cobbled together on the basis of political exigence and ideological aspiration, an economic crisis would hit one part of the currency union more than another. In the absence of all the customary safety valves, the call would come for Brussels to step in to do more.

It’s no coincidence after all that the Lisbon Treaty establishes on a legal footing, for the first time, another barely-known leadership post; the President of the Eurozone (see the Protocol on the Euro Group here: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2007:306:0153:0153:EN:PDF).

If you like, it’s the prototype for a Euro-Chancellor to go with the EU President and the EU Foreign Minister. Expect the importance of that post to grow swiftly.

We can also anticipate a growing backlash from trades unions and the Left against Brussels as emergency measures are touted; and also increased wariness amongst non-Euro countries to sign on the dotted line.

But above all, as the crisis deepens, the lesson from the past five years is that the planners and legislators in Brussels will call for more powers and more integration. Problems generate solutions made in Brussels and the European Central Bank’s home at Frankfurt. They will turn increasingly to the financial and fiscal models of other federal states across the world, to correct the imperfections of their federal currency. One might suggest cynically that this was the measure all along, with politicians refusing to admit to a greater project than their electorates at the time of Maastricht would have swallowed.

Perhaps this is the very moment that a two-tier European Union becomes set in concrete, with the ‘ins’ now consenting to the administrative forms needed to make their currency work in a crisis, and the ‘outs’ finding the step to currency union to have become too much of a bound.

The cost certainly will be heavy. For the British taxpayer, and regardless of the government in power in Westminster, the further we are out, the less burned we will be.

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  • John Wood

    Unemployment in Greece is an acceptable cost to keep the Euro intact.
    (Paraphrasing comments made by Eddie George when he said that unemployment in the North is an acceptable cost to keep inflation down in the South)

  • W. C. Catchpole

    If you are going to use classical quotations you might at least get them right. Vergil’s original was “Timeo Danaos et dona ferentis”, the last word being the plural present participle meaning “bearing”.
    A Pedant

  • http://profile.typepad.com/1232107139s22118 Lee Rotherham

    Since both are correct forms of the accusative plural,and it was quoted from memory, I hope you will excuse me this once!

  • Socrates

    Nowadays, it’s not so much as you quote Vergil having Laocoon saying “Equo ne credite, . . . , timeo danaos et dona ferentis”, it might be more appropriately “Euro ne credite, . . . ,timeo Danaos et debitos ferentis”.
    Or perhaps put more aptly, “Nicht vertrauen dem Euro,. . . ,”Ich fürchte Griechen der Schulden durchführung!”