The Euro: The Politics of the New Global Currency
By David Marsh
(Yale University Press, 352 Pages, $35)
Imagine, if you can, that the federal government abolishes the dollar. Just does it because our betters have determined, in their wisdom, that it’s what we need. This will boost the economy, they say, create jobs, make us healthy, wealthy, and wise, yada yada yada. But not to worry, it will be replaced by a brand-new currency called the amer. One amer will be worth 6.56 dollars. All you have to do to understand how much you are really earning or spending is multiply by 6.56. No problem!
In a scrambled months-long operation, our suddenly obsolete bills and coins are withdrawn from circulation and replaced by the new ones. Obliterated are the iconic likes of Washington and Jefferson, Hamilton and Lincoln, along with old-fashioned national symbols and embarrassing mottos like “In God We Trust.” In fact, the new currency refers to nothing that has ever existed in the U.S.A. It is graced with figurative bridges, imaginary buildings, schematic maps—neutered virtual images carefully designed to avoid any reference to American heritage. “To prevent dangerous nationalism and promote peace,” we are told.
Familiar reference points gone, everyone carries a calculator to comprehend and compare the prices of goods and services on the fly. Many bewildered older folk simply hold out their wallets and pocketbooks at the supermarket checkout and trust the right sum will be taken. In converting to the amer, merchants round off their prices—always up, of course—and take advantage of the confusion to keep on raising them, but official government statistics somehow show no unusual inflation.
Political fiction? Not in “Europe,” also called the European Union, where the citizens of 16 countries have gone through exactly that ordeal. The unelected Eurocrats in Brussels, the same who now have trouble operating the $6,400 espresso machines in their offices, decreed the end of beloved historical currencies like the franc, guilder, peseta, escudo, drachma, and that prized symbol of Germany’s postwar comeback, the Deutsche Mark. Overnight disappeared the monetary relics of centuries of European history. In their place was a warped, deracinating political tool, the euro. In the 4,000-year history of money this was the first and only example of an artificial currency, created unbidden by the populace, sans a nation behind it.
Like it or not, today the euro is a fact of life. Officially launched as a theoretical accounting unit for 11 EU nations in 1999 (five others have adopted the euro since; actual banknotes and coins were circulated in 2002), it has become, by default, the second most important international reserve currency after the U.S. dollar. The eurozone covers a population of 320 million, comprising fully one-fifth of the global economy. Nearly 20 percent more euros circulate worldwide than dollars.
Marking the 10th anniversary of its creation is David Marsh’s The Euro: The Politics of the New Global Currency. A London-based investment banker, columnist, and author of several books on European finance and politics, Marsh is well placed to give us a blow-by-blow account of how it came to be. It’s an exceptionally well-researched tale of intrigues, rivalries, and arm-twisting among European central bankers and politicos, prime ministers and presidents, many of whom he interviewed for this book. Marsh has a lively style and good eye for anecdote. He actually makes something as unappealing as the history of the euro a page-turner.
Prime mover behind the Economic and Monetary Union (EMU) of the 1990s that produced the euro was France. Beginning 30 years earlier, French policy makers saw a European currency bloc as the way to parry dollar domination. It would also, they reasoned, help shackle an industrializing postwar Ger many visibly heading for reunification and fast leaving France in the dust economically. More generally, European central bankers feared the surfeit of offshore dollars around the globe imperiled the monetary arrangements of Bretton Woods.
America’s policy of benign neglect gave the impression that the U.S. was exporting its economic problems to the rest of the world. That idea was reinforced by the brusque style of Richard Nixon’s treasury secretary, John Connally. In one memorable exchange, Connally bluntly put it to Europe’s finance chiefs, “The dollar may be our currency, but it’s your problem.” (Or as he formulated it less publicly, “Foreigners are out to screw us. Our job is to screw them first.”) That spurred the search to become less dependent on the dollar.
By the 1980s, the wily François Mitterrand and his advisers decided the best way to corral Germany into cooperation was to play on its strategic insecurity. They would parlay France’s nuclear force de frappe into a deal that would negate the powerful D-Mark. When the Germans proposed a Franco- German Defense Council for joint decision-making, for instance, France countered with a Franco- German Economic and Finance Council in tandem with that. As Marsh relates in one vivid anecdote, Mitterrand sent a top adviser, Jacques Attali, to bargain with Bonn. When German officials raised the nuclear issue, Attali surprised them by asking to discuss instead Germany’s atomic bomb. “You know we don’t have the bomb,” they protested. “I mean,” Attali coolly replied, “the D-Mark.”
The Mark and the Bundesbank were the pride of renascent Germany. It took more than French defense guarantees to get Chancellor Helmut Kohl to part with them. After much haggling, other deal-sweeteners were found to calm German angst. The new European Central Bank (ECB) would be patterned on the Bundesbank, he was assured. It would have the same rigorous monetary guidelines and same overriding priority of fighting that old German bugaboo, inflation. Not only that, but the ECB could even be based in Frankfurt.
The clincher was German reunification. Kohl was bound and determined that it would happen on his watch. But he knew an enlarged Germany, again carrying the threat of what Churchill had earlier called “the mighty strength of the Teutonic race,” scared the rest of Europe. France and its allies like Italy and the Benelux countries let him know they would pose no obstacles to his pet project if he would spring for EMU and its concomitant, the euro. With that carrot dangling before him, Kohl went ahead and signed the controversial Maastricht Treaty on February 7, 1992 . Result: EMU, the euro—and the end of the Bundesbank and the D-Mark.
There would be much more heated horse-trading over details. Jacques Chirac and Kohl almost came to blows during one argument over the ECB’s mandate. But the deal was done and Germany was irrevocably bound to the euro—even though the German public loathed it. As Wim Duisenberg, first president of the new ECB, put it without realizing the ominous implications of what he was saying, “[The euro] is the first currency that has not only severed its link to gold, but also its link to the nation-state.”
PERHAPS BECAUSE THE EURO was founded on little more than political wishful thinking, France and Germany were unable to convince all EU member states of its virtues. The pragmatic British, along with the Danes and Swedes, officially opted out. (When French and Dutch voters roundly rejected a new EU constitution in 2005, followed by the Irish last year, virulent dislike of the euro and the inflation it caused played a large part; this was the only way they could express their feelings about being railroaded into it.) Under the leadership of Margaret Thatcher, the Brits in particular were having none of it. This resulted in the irony that London, still Europe’s largest financial center by far, is not in Euroland.
As the clear-sighted Thatcher noted in the 1980s, “A Franco-German bloc with its own agenda [has] re-emerged to set the direction of the Community.” To the House of Commons she stated succinctly her position on Britain’s joining the single currency: “No, no, no.” In case he still didn’t understand the lady, the German ambassador to London, Hermann von Richthofen, got an earful at a Buckingham Palace state dinner: “So you want me to go to Her Majesty the Queen,” she asked mockingly, “and explain to her that, in a few years, her picture will no longer be on our banknotes?” She won the monetary Battle of Britain. Independence from the euro still suits most Brits just fine. “We have the convenience of using a single currency when traveling across the Continent,” a commentator recently wrote cheerfully in the Daily Telegraph, “with none of the costs of belonging to the wretched thing.”
Today the global financial and economic crisis is stress-testing the euro as never before in its brief existence. Increasingly divergent rates of inflation, debt, and unemployment among its 16 users are painfully pressuring its Achilles’ heel, the one-size-fits- all monetary policy. Informed speculation is rife that one or more of Euroland’s debt-laden members like Italy, Greece, Portugal, Ireland, or Spain could default, with a catastrophic domino effect throughout the area. Such an event would bear out the skepticism of economists like Nobel Prize winner Milton Friedman and Harvard’s Martin Feldstein, both of whom early questioned the validity of a money based on politics.
In this masterful study of the euro, David Marsh is suitably Delphic in summing up its future prospects. He admits that “the euro will face the danger of fragmentation, with either strong or weak countries separating from the system” to recover more workable forms of national currency management. But he concludes prudently that it’s too early to say whether the 10-year-old experiment will end in success or failure.
Fair enough. But the bet here is that the euro will continue to exist whatever happens. Here’s why: to qualify for Euroland, EU states met stringent “convergence criteria” by notoriously manipulating statistics, cooking the books, and other creative accounting. And you may be sure that having invested this much political capital in it, the EU will fudge the figures, bend the rules, and do whatever else necessary behind closed doors to ensure the euro’s survival. That, after all, is how “Europe” works.
