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- The Observer,
- Sunday January 6 2002
Now all, with the exception of the dollar, are history. Last week's introduction of the euro has given 12 disparate nations a single currency, for better or worse. The lira, the escudo, the schilling and the peseta are events in European history, like world wars, the French Revolution, the Reformation.
You have to hand it to the continentals, they got this one dead right. It was no easy task for 12 nations to print €132 billion of notes and mint 37.5bn coins to a strict deadline, distribute them to around 300 million people and begin the task of withdrawing and destroying the old currencies. But with a few exceptions, the launch of the euro was more or less trouble-free. The bureaucrats of Brussels and the bankers of Frankfurt belied their reputation for bumbling inefficiency.
And the new currency has had a pretty good press. Even the eurosceptics would have to admit to a sense of excitement about the project and a novelty in handling the new currency. One tabloid even called it 'sexy', and I suspect euro notes will become a symbol of chic-ness and modernity.
But the new currency still has a long way to go and it would be premature to judge the success of the eurocrats and bankers on their ability to stack a few hole-in-the-wall machines. Sooner or later, the euro will face a baptism of fire, which will determine how a whole generation takes to the new money, and whether Britain joins euroland.
All currencies are ultimately artificial, but the euro is the most artificial of all. It is political rather than economic, its goal being to further European unity, itself a means of preventing another war between France and Germany. All other currencies have evolved almost organically, to facilitate economic life within a country. There is no example in history of a currency being imposed on a country, other than as a result of military conquest, and a single currency, the US dollar, did not prevent the northern states fighting a vicious war against their southern neighbours.
There are many potential pitfalls, because membership of euroland involves signing up to a new set of rules, rather than simply using the currency to buy a cup of coffee or a baguette. The most serious of these is the commitment to common interest rates.. These are set by the Frankfurt-based and German-oriented European Central Bank, and you do not have to be a rabid eurosceptic to assume they will be set with at least one eye on German economic interests. Whether this is appropriate for the likes of Greece, Portugal or Ireland, will be the first test of the euro. The Irish have already experienced the inflationary damage a low interest rate policy can inflict on a booming economy.
Another rule of euroland membership is the commitment to bring national budgets into balance, and keep them there. In practice, this means that the budget deficit cannot exceed more than 3% of GPD, as measured by the European Commission, which has the power to fine members exceeding this limit. This is fine in times of economic boom, but not in recession, as currently faced by many European economies, notably France and Germany, which are in breach of the 3% guideline and promising to come back within the limit by 2004. These two countries will probably manage it, but what of Italy, with its huge levels of public expenditure? A balanced budget would immediately translate into soaring unemployment and inevitable social tensions.
Those are the risks we already know about. Far more dangerous would be an external shock. Would Greece, for example, be happy to obey euroland rules if it was embroiled in conflict with its old enemy, Turkey? Or would Italy be happy to stay within the budgetary straitjacket if a renewed Balkan conflict caused a massive influx of refugees to the poor south? And how would Germany react if internal Russian conflict led to a war on its eastern border? These are the circumstances that will set the euro's sternest test.
They will also probably determine how Britain reacts to the euro. Tony Blair is putting much faith in the concept of 'eurocreep' - increasing familiarity with the currency will soften British hostility - but less enthusiastic euro-watchers believe there is nothing inevitable about this process. A few shops in London and the South East may accept euros, much as they have been accepting dollars and Deutschmarks for years, but this does not mean we will all rush to sign up for full-blown euroland membership. Retailers point out there has never been the lightest hint of 'dollarcreep'.
The idea of the pound's inevitable withering is unconvincing. Peter Hain, the pro-euro Foreign Office Minister, believes sterling cannot exist as a 'parallel' currency alongside the euro, but, of course, it will not be a parallel currency, but a significant currency in its own right. There are plenty of examples of 'small' currencies living side by side with 'big' currencies - the Canadian dollar, the Swiss franc - without doing the least damage to their economies or trade between the two blocs.
Ultimately, whether or not Britain joins the euro will be a political decision. Gordon Brown's famous five economic tests are open to wide interpretation. According to some, we are already sufficiently 'converged' with the Continent to join the euro today.
And don't forget that, for all the pomp of last week's launch, the event was anti-climactic for a very important community - the City of London has been using euros for the last three years.
And, it appears, financial experts are distinctly unimpressed by the new currency. It has lost a quarter of its value against the US dollar since it was launched in 1999. Whether Britain is in or not, the euro has a long way to go before it replaces the mighty greenback as the world's favourite currency.
