LET THEM EAT EUROS:

The euro is nothing to crow about (Giles Merritt, February 18, 2005, International Herald Tribune)

[B]efore taking Bush to task over what many see as American irresponsibility, the EU leaders who will be meeting him here next week should take a cool look at Europe's economic policy failings. They have little to crow about. From new jobs to new patents, from economic growth to industrial productivity, the United States continues to set a pace that Europe can't keep up with. [...]

At the heart of Europe's economic shortcomings lies the euro, which since its introduction in January 2002 has become a source of European pride yet also of growing alarm. The euro has gained the illusion of strength because when measured against the weakening dollar it is now worth 30 percent more than three years ago. That has disguised the in-built vulnerability of the euro that some analysts believe is calling into question its long-term survival.

The euro is rapidly acquiring the features of a politically unstable currency. The deal between eurozone governments on which it is based has at best become seriously flawed, and at worst must be considered a dead letter. The problem is the Stability and Growth Pact, the mid-1998 agreement that set out to guarantee the euro's health and credibility by limiting eurozone governments' scope for taking on national debt.

To give the pact teeth, the signatories set steep penalties to deter governments from financing their domestic spending programs through deficits. But because the early years of the euro were marked by slow growth or no growth throughout Continental Europe, Germany and France found themselves by 2003 facing fines on their breaches of the deficit limits amounting to upward of eight billion euros apiece.

They were not the only eurozone countries to have chalked up excessive deficits, and in November of that year Paris and Berlin persuaded a majority of eurozone countries to vote in favor of suspending the penalties. Ever since, the euro has lacked credible political underpinnings. To make matters worse, the EU Commission, which had been both architect and mainstay of the monetary union project that created the euro, has been sidelined on its management. The new EU constitution was used by member governments to freeze the commission out by limiting it to making "recommendations" of policy, not proposals.

European policymakers pay lip service to the need to revise and relaunch the stability pact, but most of the ideas aired so far look ineffectual or cumbersome. The truth is that eurozone governments don't really want to straitjacket themselves with a new set of rules constraining their national economic policies. They would rather hope for the best and pray that the euro's credibility holds up in the foreign exchange markets.

Artiuficially inflating the euro in order to assuage how feeble they looked in the run-up to Iraq has done them real harm.

Posted by Orrin Judd at February 18, 2005 12:00 AM