Dumping the euro to save Europe seems harsh – and the outcome uncertain
Opinion: A French diplomat has proposed a radical amputation to save the life of the EU
Floating currencies are by no means a panacea for growing our economies out of stagnation. While certainly cutting the price of exports and opening up opportunities for business abroad, a fall in currency values pushes up input costs, cuts living standards, fuels price rises and inflates external debt. The latter effect would be nightmarish for Ireland – a 10 per cent devaluation would push up what we owe foreigners by at least some €18 billion (this figure does not take account of non-financial assets). If a break-up produced an upward revaluation of the Irish pound our exports would be in immediate difficulty in key markets.
Moreover, the practicality of an “orderly” dismantling of the euro is deeply problematic. Heisbourg admits he is no economist and appeals to the profession to examine the idea critically, but points to the successful 1994 Brazilian replacement overnight of its national currency and to a number of smaller-scale orderly dissolutions of monetary unions including that between Ireland and the UK.
The suspicion must be that the euro would be infinitely more difficult and the danger of chaos substantially greater. And the idea presupposes a rationality in the money markets in pricing currencies in line with the real performance of their economies – Ireland’s nervousness in the face of its return to the bond markets at the end of the bailout, and its belief in the need for a backstop credit facility from the EU, is precisely a reflection of a deep fear of market irrationality and the inability of small players to take on speculative waves against their currencies. Monetary sovereignty for a small economy is a largely delusionary conceit – hence the appeal of monetary union.
The danger is that Heisbourg’s radical surgery would kill the patient, but his provocative analysis is an important contribution to the debate.
Most important are his warnings that the EU’s preoccupation with saving the euro is contributing to the increasing marginalisation of the UK, and probably to its eventual and regrettable exit from the union, and his insistence that half a monetary union is no monetary union, or basis for the long-term survival of the euro. And that the currency will die if current procrastination over further integration continues.