Avenue de Beaulieu: The View from Europe

Published on Monday 5 January 2009 21:06

NEW Year's Day marked the tenth birthday of the euro, a party that was celebrated by Slovakia becoming the 16th country to use the currency. In London, anti-EU protesters burned euro notes. This seems a trifle foolhardy, given how valuable the euro has become.

While it is perfectly possible to be opposed to the project for a European confederation, it does seem a little churlish to dismiss the success of the euro. True, the historical experience of trying to create multinational currencies is not good. Individual governments, sooner or later, find it expedient to ditch the straightjacket imposed by being part of a common monetary zone. Even now, I'm not euphoric about the chances of Greece or Italy staying with the euro, as both are chronically incapable of managing their budget deficits.

However, no-one deny that the European Central Bank (ECB) in Frankfurt has done a good job in herding the various economic cats that comprise the eurozone members. Inflation in the eurozone has averaged just over 2 per cent since 1999, compared with a rate of more than 4 per cent at the start of that decade. This, in turn, allowed historically low interest rates across Europe, boosting investment. Increased trade between eurozone members (a direct result of using a single currency) has also strengthened European money and capital markets. This can be seen in a re-allocation of portfolios away from local financial instruments towards financial instruments issued by other countries in the zone.

Next year, the Single Euro Payments Area (Sepa) will be established, allowing payments to be made as easily throughout the eurozone as they can be in your home country. Sepa will let customers make cashless payments anywhere in the eurozone from a single bank account.

The Brits, even at a high level, continue to be chagrined by the success of the euro. I noticed one UK government minister arguing that it was just as well Britain had not joined the euro, as interest rates would have been even lower, causing an even larger (and unsustainable) housing boom. Actually, most eurozone countries did not go through a housing bubble during the last decade. It is perfectly possible to combine low interest rates with a stable housing market, provided you regulate your mortgage providers properly – unlike the UK.

The biggest criticism against the ECB is that it has been too quick to see inflation behind every door and so kept interest rates too high during the credit crunch. This has begun to worry the exchange markets and there is a strong sentiment among traders that the euro will fall in 2009, as the ECB is forced to make rate cuts – the Americans are already at zero, with the UK about to follow.

When the ECB vice-president, Lucas Papademos, hinted on Sunday that further rate reductions might come soon, possibly this week, the euro promptly nose-dived. Papademos is Greek, but was trained in America, where he was senior economist at the Federal Reserve Bank of Boston, before returning home to become head of the Bank of Greece.

He is more outspoken than your average central banker, which hints that he might be after the top job at the ECB. He has already called for the bank to be given more powers to regulate commercial banks. And he used a speech to US economists to criticise publicly those euro members who have failed to reform their economies.

Meanwhile, the current head of the ECB, the ultra-conservative Jean-Claude Trichet, is under fire for wanting to spend 500 million on a new HQ. Now this is something worth protesting over.