One day sometime in, I think, 1997, I was chatting to John O’Sullivan of this parish. John asked me what I thought of the EU’s proposed new currency. Wrong for Britain, I said. John said that he knew I thought that, but what did I think it could mean for the rest of Europe? I replied that I hadn’t given it much thought (those were the days) to which John replied that I should join him for dinner that evening with, he added mysteriously, “an economist”. The economist turned out to Bernard Connolly, the dinner turned into a seminar, and my views on the EU’s dangerous monetary experiment were never the same again.
Bernard Connolly?
In a timely column for the Financial Times, John Dizard explains:
Very, very few economists have been vindicated by events in the Greek chapter of the euro crisis.
The one who has earned the most honour is Bernard Connolly, Manchester born and Oxford educated, who 20 years ago published a book, The Rotten Heart of Europe, describing the defects in the intent and design of monetary union.
At the time he wrote it, while on holiday, Mr Connolly ran the monetary affairs unit of the European Commission. He was fired and ostracised….
The economist has not changed his mind that the euro is a fundamentally misbegotten currency with dire effects throughout the monetary union. “People misapprehend the problem of the euro when they talk about government debt crises. The problem is with the relative competitiveness of each of the nations as a whole. Adjustment within the euro area requires an internal devaluation, which means deflation or depression, or a transfer union [in which the better-off states subsidise the worse off].”
Germany, he says, would be bankrupted by a transfer union, even with very low interest rates. “It would have a bigger effect, indefinitely, than the intended [post first world war] Versailles treaty reparations payments.”
What does he think should happen?
Germany [should] leave the euro area. That . . . would minimise the financial damage from the dissolution that is ultimately inevitable.”
I’m not convinced by that “ultimately inevitable” (although, for obvious reasons, I’m a little hesitant to disagree with Mr. Connolly about anything), but as for Germany, well, yes. To shamelessly quote myself from a post on this very Corner from May 2010:
A risky but possibly more adroit alternative would be for Germany (and other countries in the eurozone’s north) to pull out of the single currency, thereby regaining control of their own financial destiny (so far as that is within the power of any individual country). The “weak” euro left behind could then depreciate, giving the PIIGS the break they so badly need.
I re-read my battered and creased old copy of The Rotten Heart of Europe yet again this year. It is a brilliant, prescient book that has stood the test of time to a remarkable degree. Mr. Connolly is a prophet who deserves a great deal of honor.
And he gets some from The Market Monetarist today:
Bernard Connolly who wrote the book “The Rotten Heart of Europe” warned against exactly what is going on now. Nobody wanted to listen. In fact Bernard Connolly was sacked from the European Commission in 1995 for speaking his mind.
The whole of the post, which is angry, and rightly so, is very well worth reading. Its author, Lars Christensen, concludes as follows:
I can only say that I can understand the Greek population’s anger over seven years of economic and social hardship and I likewise can understand that the taxpayers of Finland don’t want to pay for yet another meaningless bailout of Greece. But you should not blame each other. You should blame the European politicians who brought you into the euro.
Blame the eurocrats who never understood Hayek’s dictum from his great book “The Fatal Conceit”:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
The euro is a fatal conceit.
It is. And the way to mend it is, one way or another, to end it.