With the threat of Greece defaulting on its debt, the euro’s woes have been drawn sharply into focus since this article was published. For our experts’ most up-to-date views on where the euro is likely to head now, read the latest on Greek debt crisis and the future of the euro here
Frits Bolkenstein, the former EU Commissioner for the internal market, has put it on record that the euro may not survive.
Formally, the founding members of the euro club wanted entry to be exclusive. The criteria for joining the Euro was extremely strict. The German government in particular was concerned that unkempt members would undermine the club’s credibility.
Ostensibly, the barriers to entry were stringent. The five Maastricht convergence criteria, set out when the Treaty was ratified in 1993, demanded that:
• Public budget deficit as a percentage of GDP should be less than 3%
• Gross public debt should not exceed 60% of GDP
• The inflation rate should be within 1.5 percentage points of the best three EU performers
• Long-term bond yields should be within 2 percentage points of the best three
• The applicant’s currency would have to respect exchange rate margins for at least two years before entry.
But these barriers to entry were so onerous that by 1997 only Luxembourg satisfied all five. Italy, Greece and Belgium did not have a cat in hell’s chance of meeting the requirements. Yet still they got their membership cards.
In reality, all talk of strict adherence to the Maastricht criteria was a diversion. It was a tactic to keep German opponents to monetary union quiet. In the small print, the Council of Ministers was not formally bound by the convergence criteria when it assessed a country’s application to join the euro.
So although the Germans had insisted on having ‘black tie only’ on the invitations, everyone who wanted to join was admitted. The Belgians came in their lounge suits. The Italians and Greeks didn’t even have a jacket or tie! The whole episode demonstrated the political nature of the euro project, rather than any long-run economic viability.
Believe it or not, more countries are lining up to join the euro today. Some are waiting outside the club dressed in jeans and trainers. Next New Year, Estonia, Lithuania and Slovenia hope to start using euro notes and coins. Cyprus’s target date for euro membership is 2008. Malta and Latvia hope to join that year too, and Slovakia the year after.
The Czech Republic has declared a commitment to adopting the euro in 2010 while Poland has not yet set a date. Hungary is likely to shift its target date from 2010 to 2014.
The criteria for joining the euro: will the euro survive?
There is no doubt this emerging market is risky. Last month Standard & Poor’s, the credit rating agency, lowered the outlook for Hungary’s sovereign debt from ‘stable’ to ‘negative’. But whatever becomes of Hungary, the euro club won’t be worth joining by 2014, we think.
Frits Bolkenstein, the former EU Commissioner for the internal market, has put it on record that the euro may not survive in the long-term. He warns that the euro would face a dramatic test in about 10 years time when the pensions crisis hits Europe ‘ruthlessly’. As the swelling numbers of baby-boomers reach retirement, there will be too few workers to pay the taxes needed to service their pensions.
Important states like Italy, the third largest economy in the Eurozone, are totally unprepared for this crisis. They ‘will be forced by political pressure to borrow more and increase their budget deficits, with consequences for interest rates and inflation.’ And all other countries using the euro would be affected by the consequent deficits and pressure on the single currency.
It is difficult to avoid the conclusion that members of the Eurozone are faced with the stark choice of either bailing out high deficit countries like Italy, or cutting Italy loose from the rest of the Eurozone in order to stave off a currency crisis. And there is a growing feeling that letting the likes of Italy and Greece into the euro in the first place was a mistake.
The German authorities in particular now want to review the guest list.
Slovenia, Estonia and Lithuania want to join in less than 11 months time. But last month the Bundesbank argued that high current account deficits in Eastern Europe could pose a risk if these countries enter the euro club too fast. It went on to say that the biggest risk lies in setting a potentially incorrect conversion rate when entering the single currency. This is particularly dangerous for an economy in transition playing catch up with the West.
These arguments are valid. Indeed, what the Bundesbank seems to be implying is that these countries are just too poor to join. But no European official or bureaucrat would ever say this on record.
So, on this basis, there is little chance of keeping Slovenia out. Nestled between Italy and Austria it endured a softer version of socialism than other parts of Eastern Europe. It has always been relatively prosperous. Indeed Slovenia is wealthier than Portugal, an original euro member. It is likely to get the go-ahead to make preparations to join in January 2007.
The criteria for joining the euro: keeping future entrants at bay
The EU is choosing to use a spurious argument to keep other future entrants at bay. The Austrian Finance Minister told the European Parliament that ‘regarding Estonia and Lithuania, as the figures stand, things look bad.’ He was referring to these countries’ inflation rates, which are a little higher than the EU average.
But this differential merely reflects the one-off rise in energy prices from Russia. Furthermore, these states are closer to satisfying the Maastricht criteria than Italy was when the euro was first launched!
There is no use senior EU officials saying now they regard the Maastricht criteria as necessary but no longer sufficient. This would amount to an arbitrary change in club rules, and leave the EU open to legitimate accusations of discrimination.
Moreover there is nothing to stop the Baltic republics massaging their inflation numbers in the time-honoured EU tradition. Brussels’ failure to control the door of the euro club means the riff-raff are already VIP members.
As other countries push their way past the bouncers into the euro club, it will go further downmarket. Contrast this with the economic prosperity of those European countries which haven’t joined: Switzerland, Norway, Denmark, Sweden and the UK.
Only a comedian would want to swap such class for the dingy ambience of the euro club.
By Brian Durrant for the Fleet Street Letter