The response to the distinctly dodgy (and frequently repeated) claim that, say what you will, one of the achievements of the euro is that it did at least manage to preserve “price stability” is that it rather depends on which country and on which assets.
Here’s a handy reminder by Allister Heath (writing in last week’s Spectator) of the root causes of Ireland’s current woes:
There is a crucial aspect of the Irish crisis that everybody appears to have forgotten, which goes a long way towards explaining Ireland’s problems: its membership of the dysfunctional single currency, an institution it should never have joined. Ireland, like Britain, had its economy deformed by debt — the result of year after year of dangerously cheap credit, aided and abetted by central banks. Ireland’s cheap money came from the European Central Bank, which kept interest rates even lower than the Bank of England, thus guaranteeing an even greater boom and subsequent bust. Even in January 2006, when many of the stupider lending decisions taken by Irish banks were being planned, eurozone interest rates were only 2.25 per cent. This arguably made sense for Germany, but was absurdly low for Ireland; it could have done with 9 per cent.
Politicians always like to take credit for prosperity, real or illusory. For some time in Ireland, inflation was running higher than interest rates. That meant ‘real’ interest rates were negative: companies and consumers were being paid to borrow. Projects that would never have been worthwhile had the authorities priced money properly were signed off with abandon.
Of course, Ireland’s microeconomic reforms — including cutting corporation tax to 12.5 per cent — played a key role in transforming its economy from backwater to global hub. But much of the reported ‘growth’ was froth caused by excessively low interest rates. When the bubble popped, thanks to the US subprime debacle, the consequences were devastating. As property prices slumped and firms went bust, so, predictably, did most of Ireland’s banks.
Ireland’s membership of the euro was thus the single most important reason for last week’s cripplingly large bailout of its financial institutions… Stoking the boom, compounding the bust: the single currency has been a curse for Ireland’s economy. The idea that one interest rate would fit so many countries was always a nonsense. The tragedy is that so many in Ireland have had to suffer so much to prove it.
That’s spot on. And it’s something well worth remembering when you hear EU politicians ranting on about the failings of American capitalism. It’s certainly true that Wall Street—with a strong assist from Washington DC—has made its share of sometimes gigantic mistakes in recent years, but the creation of the euro still remains one of the most irresponsible financial gambles of our current era.