Liz Lightfoot reports on the Leicester Exchanges live debate, which took place at the Lloyd’s Building, London on Wednesday 7 March 2012. The topic under discussion was: Is the euro finished?
Ask not what will happen to the euro, but what will happen to the pound.
The euro will survive and take its place alongside the US dollar as a reserve currency within 10 years while the pound flounders at the mercy of global pressures, a leading member of the European movement and former Parliamentary adviser has predicted.
Braving the wrath of those who believed the flawed design of the eurozone was to blame for the collapse of the Greek economy and its human toll, Petros Fassoulas, Chairman of the European Movement UK, told a heated debate in the heart of the City of London that it was time to look at the bigger picture.
“There is a future for a common currency in Europe and it can deliver,” he told Leicester Exchanges, the third in a series of debating forums open to the public and hosted by the University of Leicester. “We are redesigning and re-structuring the eurozone and if that means more euro then we should have it,” he said.
The topical subject of the forum – Is the euro finished? – attracted traders, business executives, politicians and economists to the packed event at the Lloyds building on March 7th.
Petros and the two other panel members – Bill Cash, the euro-sceptic Conservative MP and Panicos Demetriades, a leading UK academic in the area of finance and development – were challenged by the audience to diagnose what was wrong with the euro.
Paul Wiffin, a member of the UK Independence Party, said the collapse of tourism in southern Europe was so severe that an Albanian waitress in Venice had told him she was returning to Albania because the tourism was stronger there. It was time to devalue the euro and save tourism and the livelihoods of millions of people, he said.
Bill Cash, who led the Parliamentary rebellion in opposition to the terms of the Maastricht Treaty that ushered in the euro, said the question was not what was wrong with the euro but whether there was anything right with it. The euro could never have worked because of its intrinsic fault lines – the diversity of economies that were brought together and trapped in a strait jacket. Unlike the United States, a democratic union that had grown up over 200 years, the European Union was profoundly undemocratic, he said. As the euro crisis escalated democratically elected governments were being replaced by un-elected technocrats.
“We are facing the most astonishing crisis of democracy in the whole history of Europe,” he warned.
Taking a middle ground, Panicos Demetriades, Professor of financial economics at the University of Leicester, said the eurozone was set up as an irrevocable and irreversible currency and he believed it should remain so. However, there were deficiencies in the way the eurozone was set up that had to be urgently tackled, not least the monetarist doctrine that was enshrined in its blueprint.
“This monetarist doctrine has amplified the problem. What should change is this monetarist design. There should be a move towards a fiscal union where member states should at least insure each other to some extent from major shocks,” said Professor Demetriades, a former consultant to the OECD and the Economic and Social Research Group.
Since December the European Central Bank had played a major stabilising role in financial markets by providing unlimited liquidity to banks at low interest rates for three years, he added.
“It has bought time for politicians to agree and implement much needed reforms to the eurozone. Unfortunately, so far these reforms have placed too much emphasis on austerity and have not addressed adequately the fundamental causes of lack of growth and financial instability.”
Looking at the causes of the current euro crisis, Petros Fassoulas said that the single currency in Europe was set up to make trade and investment easier.
“This is exactly what happened in the first 10 years of the eurozone. Trade did increase between the member states, inflation was stable creating a much better enviroment for inward investment. Above all, the cost of borrowing came down which provided a lot of countries with huge opportunities,” he said.
“Unfortunately some member states took that lower borrowing rate as a given and they over borrowed and that is where the problem lies to a large extent. It was individual irresponsibility on the part of some of the states and unfortunately the civil service bodies of the European Union did not have the authority to stop member states from borrowing and running up huge budget deficits.”
Professor Demetriades said the missing element in the architecture of the eurozone was crisis management. It was useful to compare Europe with the United States, a currency union with a federal bank that made fiscal transfers from the richer states, such as Maryland and New Jersey to poorer states such as Mississippi or West Virginia.
“These automatic transfers help to even out even great income differences and provide a safety net in the face of negative shocks.”
By contrast, the European Central Bank was not allowed to lend to member states and the eurozone tried to restrict fiscal and public deficits by enforcing the Stability and Growth Pact (SGP) limits on member states.
“It is widely thought that the SGP measures failed because countries did not stick to those limits. I think that is a superficial analysis. The real problem of the SGP is that it did not take into account the effects of the business side of the deficit so was bound to fail,” he said.
When income from business and industry declined so did government revenues from direct and indirect taxation. Costs such as unemployment benefit rose and the governments of individual states were unable to stick to the limits and had finance and refinance their debt by borrowing on the financial markets.
“Eurozone countries are paying a premium over countries with comparable public finances that have their own central banks. It makes them very vulnerable to downgrades. Investors want to avoid countries where currencies are uncertain,’ he said.
Throughout the crisis Greece had been forced to implement draconian cuts in public spending. “What was most surprising was the belief that was held by many eurozone officials that such cuts were necessary to restore credibility in Greece’s public finances. This completely underplayed the negative effects on housing, unemployment and human misery. These models of financial markets rule out default by assumption – the economists who believe in these models do not consider the possibility of default and so they are shocked when it happens.”
The austerity measures, based on economic models that regarded government spending as wasteful, had plunged Greece into a deep recession as a result of which it failed to meet the debt repayments.
Asked what could be done to tackle the crisis, Professor Demetriades said there needed to be investment in economic growth, especially through small and medium sized companies. The euro was an overvalued currency for most of its members. Countries such as Germany that benefited should contribute most otherwise the eurozone could end up as unsustainable. “And that will not be the fault of Greece, or Spain, Italy or Portugal,” he said.
Bill Cash said the eurozone was always a bird that could not fly and it was irresponsible to turn it into an irrevocable dodo.
“We are dealing with the economies of 450 million people in Europe and also all the global consequences. If a country leaves the euro it would have to leave the EU as well.”
He believed it was necessary for Greece to leave the euro and the consequences would be contagion with other member states re-thinking their membership. If a country exited the euro and the EU there would have to be renegotiation with all the other member states and that would require treaty amendments that would definitely involved a referendum.
Instead of trying to muddle through, the political leaders in Europe needed to sit down together at a convention. “They should cut the cackle and get down to the realities of life, accept this is a complete mess and see what kind of a Europe they want.”
But Petros Fassoulas said he didn’t believe the euro was finished. “The leadership of Europe will learn from their mistakes. Growth is now at the top of the political agenda and governments are beginning to prioritise policies to promote employment and growth in small and medium enterprises. We need greater integration. We need more Europe, not less,” he said.
Report by Liz Lightfoot, a freelance journalist and Media FHE consultant
The Live Debate
An edited version of the live debate.