Evans On The Economy -- Next, Scrap The Euro

July 21, 2005
Europe's common currency and its trappings are retarding growth.

In the wake of the French and Dutch defeats of a proposed constitution for the European Union (EU), there are modern echoes of an ancient chant heard when one king replaced another: Europe is dead. Long live Europe. But does the death of the Euro-constitution mean the death of a united Europe? Or will the recent voter turndowns actually benefit the beleaguered economies of France, Germany, Italy, Belgium and the Netherlands?

From an economic viewpoint, one major move toward a united Europe, the euro, the common currency of 12 of the 25 EU nations, has to be considered a disaster. During the most recent five years -- including this year -- economic growth in Euroland will be a measly 1.2%. Economic growth in the U.S. will be 2.7% for the same five-year period. On that basis, perhaps it can be argued that growth in Euroland equals growth in the U.S. minus 1.5%. Of course, the equation is not quite that simple. But even if it were, the common currency was supposed to help Europe, not just let it run quietly in place behind the U.S. economy.

The common currency has been accompanied by a common monetary policy administered by the European Central Bank, which makes sense only if all the countries had virtually the same fiscal policy. Discipline was supposed to be enforced by a deficit no more than 3% of GDP, but when the core economies slowed down, it became obvious that restriction would no longer hold. The new regime also was supposed to help end some of the regulations that had created Eurosclerosis, but in fact that has become even worse. Fiscal discipline has virtually disappeared in Euroland, leaving monetary policy to hold the bag in such a fashion that real growth has been reduced to unacceptably low levels while boosting unemployment back into the double-digit range in France and Germany. No wonder the voters have rebelled.

Recent figures make it quite clear that the malaise facing Euroland is the lack of capital spending. Firms that are expanding are doing so outside the core countries. High labor costs and bureaucratic strangulation are usually cited as the reasons, and rightly so. But that hardly suggests that even higher labor costs and yet another level of bureaucrats sticking their noses in the wrong places will help boost the growth rate. It's bad enough for a German business executive to be told what to do and how to do it by German bureaucrats. Imagine how much worse it gets when additional advice is offered by Italian, French and Belgian bureaucrats.

In the first couple of decades after World War II, the idea of a united Europe was as much political as economic: entwine the economies of the various nations so closely that for practical purposes they would never go to war again. Everyone approved of that. But for practical purposes the risk that Germany will attack France again -- or vice versa -- is really not the issue on which multi-national decisions need to be based these days.

The original Common Market plan, which essentially reduced trade barriers, was a great idea, as it always is, and benefited everyone. By comparison, the common currency and the common bureaucrats are much worse ideas which, if continued, will continue to keep Eurogrowth hovering near the 1% mark.

In spite of the hurt feelings of Jacques Chirac and Gerhard Schroeder, European leaders in general ought to rejoice that the proposed new constitution was rejected by the voters. Now if these leaders only had the guts to remove the top layer of bureaucracy, and -- yes -- scrap the common currency, European growth should be able to return to a respectable rate in the years ahead.

Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

Popular Sponsored Recommendations

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!