Thursday, 27 July 2006

"The Euro will collapse without political union", forecasts top adviser to commission president Barroso

In an interview with Belgian daily, De Morgen (18 March), Commission President Jose Barroso’s economic advisor, Professor Paul de Grauwe, argues that the euro has damaged Italy’s economy and that without “political union” in Europe, the euro will collapse in ten to twenty years. He also argues that the EU’s Lisbon process, which forms the backbone of the Commission’s efforts to make the EU more competitive, “is best buried.”

Professor de Grauwe, of Leuven University, Belgium, was a strong supporter of the euro at its inception. He is author of a standard text on monetary union, The Economics of Monetary Integration, and writes regularly in the Financial Times. In this article he says, “Sometimes I wonder: do we still need the European Union? I start to have doubts about that. It is sufficient that countries open up their economy. You don’t need to do that in the context of the European Union.” Asked whether the EU has added value he said, “I’m not sure about that. Probably the Union creates a framework to keep markets open in an organised way. In that respect it has added value.”

He goes on to argue that “the euro is a bad thing for the Italian economy. I’m afraid that Spain is also evolving in the same direction. If that happens, we are stuck with a big problem.” He says that developing a “political union” is the only way to mitigate the problems created by the euro, saying “A political union is the logical end-point of a currency union. But if that political union fails to materialise, then in the long term the euro area cannot continue to exist.” He says,”Now that nobody appears to want that political union, you can begin to wonder whether monetary union was such a good idea. I hardly dare predict that, in the longer term, the monetary union will collapse. not next year, but on a time-frame of ten or twenty years.

“There is not a single monetary union which survived without political union. They have all collapsed. You invariably get big shocks. A monetary union becomes very fragile without a political framework. With the exception of a Don Quixote like Guy Verhofstadt (Belgian Prime Minister and author of the book “The United States of Europe”), I see nobody who is pushing the case for a political union.” He said, “A large free trade zone remains the only feasible option for Europe. It’s an illusion that we can realise a political union in Europe in the near future. Political unification has failed. But that is a big problem for the currency union. That is in danger.”

Prof. De Grauwe continues: “Lisbon was a political fiction. The Lisbon process is best buried. The whole process, for that matter, is based on the wrong diagnosis. We have built a system of social security that gives people too many incentives not to work. They can easily interrupt their career and leave the labour market early. For many people it is financially unattractive to work. So we shouldn’t be surprised that economic growth is subdued.” He remarked that productivity per hour worked in the EU is the same as in the US, but that because Europeans take more time off, growth is slower than in the US where people work more and consume more.

In another article in the Financial Times on 5 May last de Grauwe writes: “The fundamental problem is a flaw in the design of the eurozone which has completely centralised monetary policy while leaving important tools of economic policies in the hands of national governments. If this flaw cannot be remedied, the eurozone will not be sustainable.”
These articles are accessible on the internet under De Grauwe, Paul. One of his web-sites “The Eurozone: Problems and Prospects” gives a detailed analysis of the eurozone from its inception. It concludes “Without further political integration one can predict with great confidence that the European Monetary Union will not last.” It is clear that Professor De Grauwe does not believe that further political integration is possible in the EU because there is no popular, democratic support for it, however hard the Eurocrats and Europhiles seek to push it. Hence his confident prediction of the eurozone’s inevitable collapse. Irish politicians and pundits might take note.

By Anthony Coughlan
Secretary of The National Platform EU Research and Information Centre, 24 Crawford Avenue, Dublin 9; Tel: 00-353-1-8305792