This week I am spending a few days in London, before coming home to vote in the Irish General Election.
In London, I have been invited to give some lectures to students in the London School of Economics about the euro, which is the centre piece of the project to achieve Economic and Monetary Union in the EU. To prepare my presentations for the students, I have done some research on the history of the project that culminated in the euro, the common currency of the EU. Some of our mistakes were foreseen long ago.
The first serious outline of a plan for a single currency for Europe was done as far back as in 1971, in a paper prepared, at the request of the other five heads of Government of the Common Market, by the then Luxembourg Prime Minister, Pierre Werner.
Pierre Werner’s report was prepared before either Britain or Ireland joined the Common Market, but we were both put on notice by his report that this was the direction the body we were joining was heading, and we were free not to join at all if we did not want to go in the direction of a single currency, and accept what it entailed.
The Werner Report was quite specific that being part of the euro currency would mean EU interference in domestic economic policy making. Here is an extract from the Report, written back in 1971
“To facilitate the harmonization of budget policies, searching comparisons will be made of the budgets of the Member States from both quantitative and qualitative points of view. From the quantitative point of view the comparison will embrace the total of the public budgets, including local authorities and social security. “
It was clear that EU scrutiny would extend beyond narrow public finance, to include impacts on the broader economy. It said
“It will be necessary to evaluate the whole of the fiscal pressure and the weight of public expenditure in the different countries of the Community and the effects that public receipts and expenditure have on global internal demand and on monetary stability. It will also be necessary to devise a method of calculation enabling an assessment to be made of the impulses that the whole of the public budgets impart to the economy”
It is quite clear from this extract that the framers of the project foresaw the sort of that arose thirty five years later, namely
Some members running excessive underlying budget deficits and building up unsustainable public debts( as in the case of Greece),
and others over stimulating internal demand through excessive private credit, and thus destroying their competitiveness within the single currency zone( as in the case of Ireland).
But when the Euro eventually came into being , the EU institutions did not really try very hard to harmonise budgetary policies , nor did they try seriously to control the “impulses to the whole economy” either.
A few token efforts were made, but when these encountered political resistance, there was no effective follow up. It was as if we wanted the benefits of a single currency, without paying the price. The first countries to break the borrowing rules were Germany and France, and once they were allowed to get away with it, it was inevitable we were heading for trouble, because the basic ground rules, laid down as long ago as 1971, had been ignored and broken with impunity.
In 1989, a second report was prepared with the goal of reviving the project for Economic and Monetary Union, which had had to be shelved because of the oil crisis of the 1970s. This time the report was prepared by a group chaired by Commission President, Jacques Delors , and on which Ireland was represented by Maurice Doyle.
This Delors report was even more specific in envisaging the dangers that inconsistent economic policies within the single currency area could give rise to.
“Monetary union without a sufficient degree of convergence of economic policies is unlikely to be durable and could be damaging to the Community. Parallel advancement in economic and monetary integration would be indispensable in order to avoid imbalances.”
It went on to predict exactly what went wrong in Ireland’s case. Recalling that financial markets are very bad at predicting crises, and go on lending long after they should have stopped, it said
“Experience suggests that market perceptions do not necessarily provide strong and compelling signals and that access to a large capital market may for some time even facilitate the financing of market forces might either be too slow and weak or too sudden and disruptive. Hence countries would have to accept that sharing a common market and a single currency area imposed policy constraints. “
This warning was given in a report co authored by the then Second Secretary of the Irish Department of Finance and future Governor of the Irish Central Bank! It would appear that neither institution paid much heed to this warning in the years between 2000 and 2008.
It would also appear that other member states of the Euro paid little attention to it either, because I understand it has been obvious from figures in the statistical appendices to Irish Central Bank reports since 2003 that big imbalances were building up in the Irish housing and credit markets.
The European Commission and the Finance Ministers of the Euro area countries could read this data about excessive credit build up, but their reports on the situation in Ireland and Greece were anodyne and circumlocutory. The European Central Bank was not very good at fulfilling its Treaty mandate of coordinating the monetary policies of member states either.
The truth is that we have, as a result of ignoring the warnings of Delors and Werner reports, facilitated a European banking crisis, because by removing capital controls to facilitate the single currency, we allowed European banks to become totally dependent on one another, so that if one fails, all may fail.
Now at meetings next month, the Heads of the Governments of the European Union have got to find a European solution to this European banking crisis, in part by taking seriously the words of Pierre Werner and Jacques Delors, even if it is nearly forty years late!