It’s the politics, stupid! by Simon Tilford
Many economists have been accused of being too gloomy about the euro because they underestimate the degree of political commitment that eurozone countries have made to the single currency. The ECB’s success in buying time for the politicians has emboldened those who argue that when push comes to shove, policy-makers will do what is necessary to save the euro. The optimists tend to attribute continued scepticism to a poor understanding of the politics or to a refusal to acknowledge the significance of the steps already taken. In fact, those who claim that politics will come to the rescue irrespective of how bad the economics get are guilty of complacency. There is a gulf between the political objectives that member-states were pursuing when they joined the euro and where they find themselves now. This is the principal reason why their commitment to rectifying the flaws of the euro is so weak. For the French, the euro was a way of regaining some control over monetary policy from the Bundesbank and of maintaining economic and political parity with a newly united Germany. There was next to no discussion in France over what a currency union implied in terms of the country’s economic and social policies, and certainly no sense that by joining the euro France was effectively committing itself to a liberal economic agenda. The French pushed strongly for a broad euro including Italy and Spain, not out of any commitment to closer EU integration, but in an attempt to further dilute Germany’s hold on the newly-created European Central Bank (ECB).
France’s plans have backfired spectacularly. Far from helping the country maintain economic and political parity with a united Germany, the euro has increased German economic and political influence. On the face of it, it is not obvious why this would be the case. The French economy has outperformed the German one since the launch of the euro, France (unlike Germany) has very healthy demographics, and the French economy (unlike Germany’s) is able to generate growth in domestic demand. But when countries have no control over the currencies in which they borrow – as is the case in the eurozone – fiscal strength and a country’s trade balance take on disproportionate