The current expression of the European ideal is the creation of the single currency, the Euro. The problem with the Euro is that running a currency without the ability to control the economies of the countries using has always failed in the past. The European Central Bank relies on changing interest rates and on member governments complying with the Stability Pact. The Portuguese have already admitted to taking an Enron-like approach to the requirements of this Pact, the French have argued that France is a special case and Germany is near to breaching its provisions. Whilst the European Commission have threatened to take over control of Portugal's economy it is politically inconceivable that they could think of doing so for Germany. The pressure on the Euro will increase if the plan to extend membership of the EU and the Euro to most the Central and Eastern European States goes ahead. The failure to address inflexibility in European labor markets is another factor which will create problems for the new currency, see David Smith's "Will Europe Work?" We have also seen in Germany the problems that currency transparency is creating for German labor, where it is difficult to justify the large gap between the hourly rates paid in Germany compared to the hourly rates in Spain and other EuroZone countries.
The Sunday Telegraph 24 August 2003 reported that the single interest rate of 2% in the EuroZone is causing problems for a number of countries.
a single interest rate should be the bedrock of monetary union, the majority
of countries that embraced the euro zone are finding that the European Central
Bank's rate is either stifling growth or threatening inflation."
The Daily Telegraph 1 June 2003 reported that "The euro zone is on the brink of a prolonged economic slump. Germany - now technically in recession - has suffered a year of declining retail sales and two years of falling investment."
The report adds that "The euro's recent lifetime highs, those cheered by the politicians, make European exports less competitive, of course. Such exports generated three quarters of all euro zone growth in 2002 - which is why the single currency's sharp rise against the dollar has sparked severe downgrades of euro zone growth forecasts."
The Daily Telegraph 20 August 2002 reported that "Chancellor Gerhard Schröder of Germany received a powerful blow to his reelection hopes yesterday when the Bundesbank warned that Germany could breach the deficit rules of the euro Growth and Stability Pact as soon as this year." The report added, "If Germany does breach the pact's deficit rule, the European Commission will be obliged to invoke the "excessive deficits procedure". Germany would have to comply with financial diktats from EU officials and, theoretically, could be fined up to 0.5pc of gross domestic product, or about Eu10 billion (£6.3 billion)."
At present  Britain and Denmark remain outside of the Euro Zone, and there are no signs that the British electorate would approve British entry into the EuroZone in the near future. If current developments in Portugal are early indicators of future problems hard political decisions will need to be taken by Euro Zone members within the next five years. Decisions could include the creation of a single European State with full control of tax and revenue throughout the EuroZone, expulsion of the weaker members of the EuroZone, or the end of the Euro experiment. Dr Gerard Lyons writes that "European Monetary Union (EMU) will need to become a political union to survive. This is one lesson from a historical analysis of monetary unions in the nineteenth and twentieth centuries. Monetary unions of large sovereign nations which do not have political union eventually fail, sometimes after a long time."
The Daily Telegraph 20 August 2002 said of Germany's problems with the Stability Pact that, "It needs an interest rate cut, but the European Central Bank looks at conditions across the zone, and sets one rate for all. Nearly four years on, this has yet to force the convergence the euro's architects envisaged. Ireland, Portugal and Spain overheated, clocking up inflation of 3pc-5pc, compared with Germany's 0.8pc. Maurice Fitzpatrick, of the accountancy group Tenon, calculates Germany should have interest rates of 0.8pc, not the ECB's 3.75pc."
The report concludes that, "The floods [of August 2002] have washed away Germany's original budget projections, and with them the evidence that the budget was already under water."
Sir Alan Walters said recently - Were already seeing real problems for the euro, he said. I dont know precisely how it will break up, but I know it will break up.
Writing in The Times 29 August 2002 Anatole Kaletsky says. "Even the Foreign Office has given up on the euro, to judge by Jack Straws shift of focus to constitutional issues in his recent speaking tour.... Europe is bouncing along the bottom of a deep economic slump.
Meanwhile, Germany, which is now perennially Europes weakest, as well as its largest, economy, is being sucked into a deflationary whirlpool similar to the one that drowned the postwar economic miracle in Japan. Yet there seems to be little hope that either democracy or good sense will come to the rescue. To understand this grim diagnosis, we must focus on Germany, whose dysfunctions and blunders have been primarily responsible for Europes economic woes since the late 1980s. That the German economy is going from bad to worse was shown yesterday by the third fall in three months in the closely watched IFO economic situation index. Germanys economic growth is projected at around 0.5 per cent in each of the next two years by the most optimistic forecasters and nobody expects any reduction in unemployment in the foreseeable future."
"This is not surprising to anyone with an understanding of economics or history. When Germany entered the euro it made the same mistakes as Britain did when it rejoined the gold standard in 1925 and re-pegged the pound to the dollar after 1945. Like Britain in the 1920s or the 1950s/1960s, Germany has locked itself into a fixed exchange rate with labour costs that are unsustainably high." "The present ultra-monetarist rules of the EuroZone effectively ban expansionary Keynesian policies to reduce unemployment. Yet precisely such policies were demanded by Europes voters. The implication seemed to be that the Maastricht treaty would be reopened, the stability pact would be rewritten, and the ECB would surely be reformed. The reaction in Germany to the flood disasters makes these hopes seem increasingly forlorn."
The Economist 25 July 2002 stated that "The European Union's excessive deficit procedure hangs like a sword of Damocles over the finance ministries of the euro-zone." "Under their stability and growth pact, the 12 EU countries that use the euro promise never to run a budget deficit above 3% of GDP. If they do, in theory they can be fined up to 0.5% of GDP. Portugal will soon admit that its 2001 deficit was around 4%. With so clear a breach, the commission will have little option but to start proceedings."
The Daily Telegraph 21 September 2002 reported that "Had Sweden joined the euro with Finland, the economy would almost certainly have suffered the sort of slump that has hit its neighbour since the collapse of the high technology bubble two years ago ..... Sweden and Finland offer a near-perfect laboratory study of why it matters whether a country retains control of its own monetary policy in difficult times." "When the technology crash hit in 2000, Sweden absorbed the shock by letting the currency fall by 16 per cent over a period of several months against the euro - though it has since edged back up."
"Finland is not so lucky. The Finnish economy is in trouble. Excessively low interest rates in the euro-zone led to overheating in 2000, when growth was 6.1 per cent. This fell to 0.7 per cent in 2001 and a -2 per cent annual rate in early 2002. Unemployment has jumped to 9.5 per cent, but there is almost nothing the Finnish government can do to counteract the slump."
is more of a surprise. It has one of the most dynamic economies in Europe:
too dynamic for the euro-zone, as it turned out. Interest rates set for the
"sick men", Germany and Italy, led to a property boom. Inflation
rose to 5.5 per cent. The Dutch "mini-bubble" burst this year, cutting
growth to 0.5 per cent or worse."
The Daily Telegraph commented 2 October 2002 that "Barely a day goes by without bad news from abroad. The Stability and Growth Pact, which is supposed to limit government deficits, is drowning under the flood waters of central Europe. The Portuguese government admits it cannot avoid breaching it, and Germany, France, Spain and Italy are all about to do so." "There is nothing predestined about our joining the euro. Since [the Euro's] launch, sterling has been the world's most stable major currency measured by its trade-weighted average, while both the dollar and euro have fluctuated wildly."
9 July 2003 Standard & Poor's warned that it would downgrade the credit rating of EuroZone governments if fiscal discipline slipped any further. The agency said that states were behaving as if they were still sovereign borrowers, failing to recognize that default risk is much greater now they have given up power to issue currency."
The report also
stated that: "The aggregate EuroZone deficit is expected to peak at about
2.5% of GDP in both 2003 and 2004, before resuming its downward trajectory.
Greece is the only country that is not expected to show a weaker fiscal balance
in 2003 than in 2001. Portugal, Germany, and France have been subjected to
the European Commission's 'Excessive Deficit Procedure' (EDP), in accordance
with the rules of the Stability and Growth Pact (SGP).
If, as appears possible, Italy breaches the SGP's 3% deficit limit in 2004, then the three largest EuroZone member states (Germany, France, and Italy--collectively accounting for 69% of the Eurozone's 2002 GDP) will have been in violation of the SGP."
15 July 2003 The Daily Telegraph reported that President Chirac of France, during his annual Bastille Day interview, demanded "provisional ways of easing" the Stability Pact in order to prevent the EuroZone slipping further into an economic slump.
19 August 2003 The Daily Telegraph reported that the Bundesbank said that Germany could again breach the Stability Pact in 2004, as a result of tax cutting plans. Germany is currently in recession, with GDP falling by 0.1% in the second quarter, its third consecutive quarter of contraction.
If there are moves to create a full-blooded European State in the near future then Britain would probably elect to leave the EU, or to become an associate member, the end of the Euro experiment would threaten the existence of the EU in its' present form. In such an event the British would probably act to further strengthen their economic and political ties with the United States; the present cultural and military connections could hardly be stronger.
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