Three Monkeys Online

A Curious, Alternative Magazine

The Euro – Friend or Foe?

The Euro two years on. The growth and stability pact shattered, and prices rising – the single European Currency is a friend or foe?

Twelve countries in Europe have now had over two years experience of living with the European Single Currency. Not only does the currency have an impact on prices and trade within the single European market, but its adoption provokes a number of questions about the nature of European integration, political dillemmas, and the European Constitution.

Andrew Lawless spoke to former economist at the Central Bank of Ireland and Economic Advisor to the Minister for Trade.

Professor Ray Kinsella, of University College Dublin:

How successful has the launch of the Euro been? Are we still in a transitional period, or can we say that the transition is over?

No, I think we're past the transitional period. The initial period involved a number of significant challenges: firstly to agree on, and enforce a single monetary policy. That policy had to be very tough, and very rigid to convince the markets on the credibility of the Euro as a currency. I think by and large it was successful in doing that. It targeted specifically inflation, and it gave no room for deviation from the expected inflation target rate. I think they did succeed in convincing the markets that this was a single currency of Deutschmark calibre.

Overall, I'd say the teething problems are behind us. The Euro has been successfully launched. There are a growing number of Euro-Denominated specialist markets and it's been overall an astonishing technical achievement in just over 10 years.

What are the chief benefits of the Euro for the average man in the street?

Well without any doubt at all, when you talk to consumers who have travelled through Europe, price transparency is probably the single greatest benefit of the Euro. You go into any of the European wide fashion or food franchises and now there's immediate price transparency. That's one of the things that has caused significant benefit in terms of downward pressure on prices. The ability of consumers all over Europe to compare prices not only on the streets of Paris, or Hamburg but also significantly on the Internet as well. The Euro provides a very transparent means of comparison and is a highly credible currency as a result at this stage.

There are other benefits as well. One of them is the abolition of the time and cost and energy and confusion of having to use 12 currencies which is not inconsiderable. Another benefit has been the downward pressure on prices – so there are a number of benefits all of which were fully anticipated. And it does make trade, it does make the single market work more efficiently.

Have these benefits been spread evenly throughout Europe? For example, talking about downward pressure on prices doesn't seem realistic in terms of Italy or indeed Spain, in terms of consumers' experiences . Is this tied into the transition period, and for example should Governments have kept stronger control over price regulation?

Well, all of the evidence shows price controls simply don't work. But what you can say is, for example, Italian citizens are now much more aware of the domestic rates of inflation in terms of prices of goods and services than they were before. And that's a good thing, because it leads to the kind of debate that you're talking about. People do know their prices are higher, because now they can compare. People who travel extensively are now very aware of the differences in prices between countries in the single currency zone, and that does put pressure on domestic sources of inflation, and it does, from an economic point of view, force governments to confront the whole issue of competitiveness, without relying on , as Italy used to do, one depreciation of the currency after another. Now, in the long term that makes for a stronger economy.

It makes for a painful period first though – doesn’t it? Can we expect things to get worse before they get better in countries where prices have dramatically risen since the introduction of the Euro?

Well, it's here to stay – that's the first point. Secondly, expectations in terms of trade unions and employers and consumers have to adapt to that. Companies know now that they have access now to the single European market, to goods and services which priced in a single European currency are significantly lower in other countries than for example in Italy. And that does force Italian manufacturers for example to hold the line to a certain extent on wage costs. It does force the Government to work with the trade unions in terms of developing the partnership approach. Where maybe for example they trade expenditures in social areas for reduced tax burdens. The social partnership model in Ireland, which did have very high rates of inflation, was highly succesful in creating a virtuous circle that reduced prices, increased social expenditure, and increased national competitiveness. The challenge for an Italian government, to take an example, is to create through social partnership, that virtuous circle, and yes, it is painful for a while, but people's behaviour changes when they realise that expectations have to adapt to a different regime. To a regime of price transparancy, and the ability of people of consumers to buy across national borders , and the ability of customers to travel to different countries – that's a very powerful stimulus to the supply side of the economy, and to the productivity of the economy.

When we talk about Governments and consumers adapting to new regimes, what about the breach of the stability pact by France and Germany?

That's an absolutely key question. The first point I'd make would be this. Since the Euro was launched, the most significant development was the fact that both Germany and France breached the stability pact levels. In other words, they said &ldquoO.K, we're supposed to keep inflation at a certain rate but it's imperative for us to try and grow our economy, to try to minimise unemployment and therefore year by year we can make no guarantee that we'll abide by the rules of the stability pact”. There are two views you can take on that . You could say that that tears up the whole basis of the agreement. I don't think it does though. I think once the credibility of the Euro was established, once the infrastructure's in place, once the expectations have been changed about price behaviour, at that stage you can begin to relax a bit and take an American style view of a more flexible trade off between inflation targets and the need to insure growth around Europe.

Leave a Reply