Euroland Politicians have long learned that if they talk about the unthinkable for long enough, it will eventually become thinkable. Before the euro was launched in 2000, there was an elaborate dance performed by the founder states to prove that it would always stand upon economic bedrock. In truth, however, the single European currency was founded upon a swamp of compromise and fudge. Various tricks were permitted to allow countries like Italy and Belgium, whose debt-to-GDP ratio far exceeded that laid down in the rules, to nevertheless qualify. France only scrapped in by treating state pension fund reserves as income. An attempt by the Germany to revalue its gold reserves was only blocked at the last minute.
Though launched at parity with the dollar, it quickly fell in value. It has only now returned to dollar parity because of the weakness of the US currency, not because of any inherent strength in the economies that underpin the euro. Indeed, average growth this year is unlikely to exceed just one percent. Governmental budgets have been predicated upon a far more vigorous recovery from the present economic downturn. A mismatch in actual and projected state incomes seems inevitable.
Last year, Portugal failed to stick with the mandatory economic targets set for euro countries and Germany only just managed to stay within the rules. Now it seems that the Germans may actually join the Portuguese as economic sinners. The French and Italians also are now suggesting that they could miss the targets. The unthinkable is being trotted out. The rules writ in stone that were supposed to underpin the new currency are being chipped away. When finance ministers in euroland have said for long enough that a revision of the unrevisable is necessary, then a reluctant, if not actively bored, public will accept the changes.
However, will the markets? In the short term, the euro is unlikely to suffer from an undermining of its foundations, simply because the dollar, which it is designed to rival, is already weak. In the long term, however, euroland’s politicians will probably pay a high price for their cynical manipulation of the rules. The markets have long memories. There was widespread incredulity at the ambitious ground rules laid out for the euro. However, despite profiteering, the physical launch of the new currency was an extraordinary success. The markets might indeed have sold the euro short initially but there was no concerted attack that would have tested the new currency’s mettle.
However, as euroland bends the rules, confidence in the currency will be damaged. Perhaps the greatest harm would come if euroland citizens themselves begin to lose faith and choose to invest their wealth in dollars or yen or even sterling.
For it is an unfortunate limitation to the trick of wheeling out the unthinkable, that you only ever soften up public opinion for something that might previously have enraged them. You do not protect yourself from the consequences of the betrayal of common sense and past assurances.
It will be a serious matter for the prosperous and complacent citizens of euroland to see their savings shattered because their political leaders undermined the worth of their brave new currency.