Long Live the Euro!

Analysing the critiques and offering explanations

, by Alain Malegarie

All the versions of this article: [English] [français]

Long Live the Euro!

After the double negative vote on the Constitution Treaty in France and the Netherlannds, Europe is plagued by a lack of self-confidence and doubts about its strength and its future. It was not by chance that scarcely a few weeks had passed after these referenda before Europe’s most successful and emblematic achievement, the Euro, came under attack in certain countries. The reasons were various. Some were questionable and on these it is pertinent to cast a new look.

In this respect, the Euro appeared to have become a scapegoat for the full range of economic and social difficulties in France, Germany, Italy (Northern League) and the Netherlands. Some populist politicians or “Eurosceptic” economists, backed by various opinion polls in these countries, bluntly advocated a return to “national currencies” and even – which is just as absurd – a system of the “dual circulation” of the former currencies and the Euro.

How could we have reached such a point just seven years after the birth of the Euro was greeted with such enthusiasm and rejoicing, not to say jubilation? In over fifty years of economic, social and monetary policy we have moved from misunderstanding to misunderstanding, from unease and even fear of where Europe, globalisation, the movement of peoples is taking us; and for this we must blame the absence of regular, courageous and informative debates led by political leaders and the media. That we should find ourselves now in such a surrealist, ubu-esque situation would be comic if its consequences (as demonstrated in the negative ballot) had not been so dramatic.

What are the objections to the single currency?

Already a few months after its introduction the Euro was severely criticized for its weakness against the US dollar which was then the world standard. Even when the Euro strengthened to 80% of the US dollar’s value some people sniggered, being unaware that until then no currency had ever reached this level. Slowly but steadily the Euro then climbed to become the second world currency – which was not a bad achievement – and even rose to overtake the quotation of the greenback by 30%. Those same pundits who had forecast and condemned its anticipated fall then ranted and raved about the consequences for European firms’ international competitiveness if the Euro became too strong, even though two-thirds of their exports were within the borders of the Euro-Zone. Moreover, the exchange rate is not the only variable in the adjustment of the import/export ratio. Product innovation and technological added-value are even more important factors in successful exports.

Domestically, on the other hand, the Euro is said to be detrimental to the buying power of Europeans. This devastating feeling is deeply rooted in the collective subconscious, and not only among the French. Yet here again we find a discrepancy between the consumers’ subjective “feelings” about price increases and the reality as scientifically computed by serious indexes such as INSEE and others. Briefly, each consumer “fills his basket” and perceives inflation in relation to what his family consumes. For example, when he or she buys fruit and vegetables, cigarettes or petrol, coffee or a pint of beer they definitely perceive a rise in prices. Some shopkeepers and tradesmen have been known to capitalize on the change-over to the Euro. In addition, we must note people’s lack of familiarity or watchfulness when handling a currency 6.5 times higher [1] than the old coins and notes which they were used to. The most typical example is the one cent coin that many people will leave at the cash-register, thinking it worth no more than a centime of franc!

Broadly speaking, however, all serious surveys, whether public or private, indicate that the purchasing power of the French has been steadily rising since 1999 (that is, since birth of the Euro as bank-Euro) and even since the introduction of the fiduciary Euro in 2002. According to INSEE the buying power of the average household increased by 2.5 % in 2002 after the deduction of inflation. This rate slowed down in 2003 (+ 0.5 %), and since then has risen again.

The generally perceived inflation rate (some mention increases of 10, 20, or even 30 per cent) is largely subjective. In the absence of explanations such perceptions are harmful and misleading. For example, increases in the prices of fruit and vegetables in winter (or summer if it does not rain) are not the fault of the Euro! Nor is the Euro to blame for the abuse of “back margins” in supermarkets or the stagnation of salaries since 2000 (partly due to the 35 hour week) which increase the “feeling” that prices are rising!

From the moment of its introduction the Euro – together with the European Central Bank, that goes without saying – instantly became the ideal scapegoat. And nobody undertook its defence. Politically it is useful to have such a convenient whipping boy. To which the answer must be – useful, yes, but also cowardly and dangerous.

Let us remember the reasons why the Euro was created

One thing leads to another. Virulent attacks have been made on the European Central Bank’s “outrageous” power as not being “democratically elected”, especially regarding its main mission: price stability.

The reason why EMU (Economic & Monetary Union) and the Euro were created has been too soon forgotten.

It was because in all developed economies from the eighties onwards economists of all persuasions and of all political allegiances (with rare exceptions) agreed on the necessity for independent central banks to be free to manage interest rates and measure for controlling inflation without political interference. Economic and monetary history is filled with examples of the disasters caused by runaway inflation and monetary crises. It is odd how this basic justification for the European Central Bank’s powers has now been “forgotten”. Thanks to the Euro, we need no longer fear two-figure inflation, nor “wildcat” (so-called “competitive”) devaluation of the currency. Stability prevails, and here the attacks on the ECB are profoundly unjust and result from the absence of informed understanding.

Some critics go so far as to speak of the “blind rigour” of the ECB. They really do have a nerve! The contrary is true, for the ECB has generally operated with a light touch in managing our brand new currency in relation to the “standard” of the US dollar. It conducted a policy of flexible interest rates from 3% to 2.50% in 1999, raised to 4.75% in 2000 and lowered again to 2% in 2003. The result has been that inflation has been held in check throughout the Euro-zone at between 2.3% and 2.1% in 2002-2004/5.

As an international standard currency, second in importance after the dollar, the Euro has remained steady despite numerous and varied crises such as the ENRON and VIVENDI bankruptcies, 9/11 and the rise of terrorism, plus major crises in Asia, Russia, Argentina – all shocks which would have rocked the former national currencies, perhaps even sweeping some away like wisps of straw – triggering extreme devaluations, steep interest rate rises and the end of economic growth. And that is without taking into account the sharp increase in import costs (petrol at €1.50 per litre, for example), a considerable increase of national debts and chronic instability which is always a heavy handicap for international exchanges. Yet all this has been ignored!


Yes, even at the risk of going against the tide of the almost unanimously critical view of the Euro, we must acknowledge the security it provides. It gives Europe greater economic leverage and political weight. Whether we like it or not, the Euro has been the most successful achievement of European construction for fifty years. Let us then protect and strengthen it through a renewed stability pact which must be respected.

Once and for all we have to admit that we cannot go on living with our abysmal public debt without penalizing future generations. This is an elementary economic and budgetary principle. Nor can we give up our margin of manoeuvre for such crucial future policies as research and development. France with its debt of 2000 billion Euros – the equivalent of €32000 per inhabitant – can barely pay the interest on what it owes, and certainly not the debt itself.

In fact, interest payments are equivalent to the sum produced by income tax. It is no wonder that the country is in great difficulty, yet practically nobody cares a pin! It must be said that for quite some time the French “have distanced themselves” from the economy. Very well, maybe the feeling is that everything is going well, as the old song says [2], and future prospects may be rosy. But for goodness’ sake keep the Euro! In our troubled times, it can, it must continue to serve us for many years to come.


This article was originally published in the November 2006 edition of The Federalist Debate, Papers for Federalists in Europe and the World.


 Night view of the Euro sculpture; source: Wikipedia.


[1In France, in Italy for example the ratio is much higher.

[2“Tout va très bien, Madame la Marquise ”, an old French folk song.

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