The story of how the euro gained currency

BOOK REVIEW: Mark Hennessy reviews The Euro: The Politics of the New Global Currencyby David Marsh; Yale University Press; £25 (€28)

LIKE MUCH else in the EU’s history, opponents of the euro single currency maintained initially that it would never be created and later that it would not work. Ten years after its creation, it has answered many, but not all, of its critics.

David Marsh's The Euro: The Politics of the New Global Currencyoffers the first recording of the politics, economics and personalities that led to the birth of the euro.

Directed by the European Central Bank (ECB) in Frankfurt under its French head, Jean-Claude Trichet, the euro is used daily in 16 of the 27 member states and has become the world’s second-largest reserve currency.

While it was created in 1999, it did not become real in the minds of the EU public until euro notes and coins were introduced in January 2002, “from Finland to the Canary Islands”, as Marsh puts it in this readable tome.

More than 20 billion notes were printed and distributed, or held in reserve, along with more than 90 billion coins.

The notes, it is said, would have reached the moon and back 2½ times.

Within two months, currencies that had lasted for centuries, such as the franc and the drachma, were gone.

The value of Ireland’s membership of the euro has been driven home in the last year or so, when it became clear that the property-fuelled bubble here would have led to a repeat of Iceland’s experience if the State had been on its own.

However, the low interest rates that have been a feature of the euro in more recent years helped to fuel that bubble in the first place, in the absence of action from the Government to use any other levers to dampen demand.

Ireland’s dual attitude towards the euro is not untypical of the experience in many other EU states, where its standing has not recovered from the price rises that were driven home, using its introduction as a cover, in 2002 and beyond.

Lorenzo Bini Smaghi, the Italian member of the ECB’s executive board and one of more than 100 key players interviewed by Marsh, best sums up the gap in perceptions that exists towards the euro both inside and outside the EU’s borders.

“Whenever I go abroad – the US, Latin American, Asia – the euro is held in great respect and esteem,” said Smaghi, who will have a place on the Frankfurt board until 2013, under the eight-year term offered to his rank.

“Yet very few people from European electorates seem to have a good thing to say about the euro. People feel the euro is responsible for bringing lots of problems. This tells you quite a lot about the way we Europeans look at things.”

The creation of a European single currency would, both supporters and opponents believed before its creation, inevitably drive forward the process of European political union. But, as Marsh points out, these dreams and fears have not been realised.

“Under pressure from public opinion, governments wish to retain maximum hold over areas of decision-making where they maintain vestiges of control,” he writes, pointing to Ireland’s State banking guarantee as an example.

Because it was not matched with centralised command over tax and spending, the euro was backed by the EU Stability and Growth Pact, which forbade member states from letting their national finances get out of control.

However, the pact has proven to be something to get around, rather than to obey. And it was the euro’s most powerful members, Germany and France, who first sought to do so when their own figures were held up in unflattering light.

Now, Ireland has had to get a five-year period of grace to puts its finances to rights; but it will have to do so in a world where the pain will be taken through spending and pay cuts.

The days of devaluation, where the bullet could be dodged, are over.

The “one size fits all” interest rate policy, Marsh argues, does not suit every euro state, particularly when electorates are slow to volunteer to bring their economies into line with best practice elsewhere.

Marsh shows how some of those most closely involved in the euro’s birth have changed their opinions, including Trichet, who now trenchantly supports the idea of inviolable central-bank independence that he once castigated when he was a treasury official in Paris.

He also does not accept the argument that the euro is bound to collapse. Instead, he believes membership of it is irrevocable.

Countries may in time have to think seriously about quitting it, but none will. Quitting would require a new currency, or the restoration of an old one; but a departing country’s foreign debt would remain in euro and the cost of servicing such a debt would rise massively, he argues.

“The only country which might do this and might have a political leader ridiculous enough to do that would be Italy,” he quotes former German chancellor Helmut Schmidt, who has never hidden his low opinion of Italian prime minister Silvio Berlusconi.

• Mark Hennessy is Political Correspondent for The Irish Times