The Corner

He Told Them So

One of the major objections to the introduction of the euro was that it was a step too far too soon. Regardless of anything else, imposing a single currency on economies operating on very different rhythms was a recipe for disaster. It was, arguably, the Germans who were the first to pay the price, with the European Central Bank maintaining interest rates at levels far too high for the faltering German economy, but, as this report from the Daily Telegraph notes, the malaise continues to spread:

“Italy is in much the same mess as Argentina in the last throes of its disastrous dollar-peg and faces a “horrible martyrdom” as long as it remains inside the eurozone, according to a market report issued yesterday. Banque AIG, the financial wing of the US insurance giant, said Italy needed a 20pc devaluation to prevent a slump and a “horrendous” explosion of public debt. The warning came as fresh data from Portugal and Italy point to the worst budget deficits since the launch of the euro. Portugal’s central bank has revealed that the country’s deficit was likely to reach 7pc in 2005, far higher than earlier estimates. Lisbon is mulling “Draconian” cuts that risk driving the debt-laden economy into deep recession. Rome’s REF research institute forecasts an Italian deficit of 5.7pc next year, smashing the EU’s 3pc limit. Both countries have seen a sharp loss of competitiveness under the European Monetary Union, chiefly through higher wage inflation than Germany. They now face grinding “deflation” to claw their way back to health. The AIG note, by chief economist Bernard Connolly, a former EU official and stern critic of EMU, said Italy was “being asked to bear the unbearable”. It has lost 30pc of its world share of exports since the late 1990s and is now “on its knees”, according to the industry federation.”

What makes this particularly interesting is that the author of the AIG report is none other than the Bernard Connolly who was a former EU official fired by Brussels in the 1990s for warning that monetary union was, yes, a recipe for a disaster. Books on monetary policy are not normally the stuff of high drama, but if you want to understand the background to the mounting crisis in the eurozone (currency speculators, pay attention), there is no better starting point than Connolly’s Rotten Heart of Europe – and it’s a terrific read.


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