The eurozone expands, but there could be trouble ahead.
It’s goodbye to the Cypriot pound and the Maltese lira, so who’s next for the eurozone?
What joy for travellers when the euro took over from 11 national currencies just six years ago! Gone was that muddle of francs and deutschmarks and lire and punt in our wallets, and all those old envelopes full of foreign change in the dressing table drawer. Suddenly all we needed were euros and the British pound.
The euro has been a remarkable success story. Its adoption by Cyprus and Malta from January 1 2008 brings the number of member states in the eurozone to 15 – a population of 318 million in a zone stretching from Finland to the mid-Med and from Ireland to Slovenia. It’s goodbye to the Cypriot pound and the Maltese lira.
I do like the design of the new coins – a beautiful Maltese cross, a shield and a prehistoric temple for Malta; and for Cyprus a 3,000 year old figure looking curiously like a Christian symbol one thousand years before its time, a 4th century BC sailing vessel and a pair of moufflon sheep. Cyprus’s coins have the island’s name in both Greek and Turkish. Maybe that will open doors on that divided island!
So who’s next for the eurozone? Slovakia is aiming for January 2009. Of the other non-euro outliers I could imagine the Danes joining within two or three years following their recent elections. Sweden is more doubtful and for the Brits we must be talking at least 10 years, if ever, given the state of British public and political opinion (see below).
Others are lining up: Estonia, Latvia and Lithuania are in the ERM; Bulgaria, Hungary, the Czech Republic, Poland and Romania are still working to get their economies in order.
For general background on the euro area see this page of the Commission’s website.
This year will be a testing one for the euro. As the economic background becomes more difficult, so politicians will want lower interest rates and a weaker currency, but the ECB is more concerned with inflationary pressures as rising oil and commodity prices push up costs.
ECB President Trichet has made it clear that fighting inflation is the priority for Europe’s central bank even if the Americans cut their rates to support the US economy. And of course a strong currency does help to contain dollar-denominated price increases.
The impact of a strong euro on particular industries is dramatically illustrated by the plight of Airbus, faced with direct competition from Boeing. Back in November CEO Tom Enders didn’t mince his words when he talked of “tremendous losses” for the company as the dollar continued to fall.
The situation has not improved since then. By the way, I thought it interesting that the Airbus boss was not complaining about the level of the euro, but underlining how the business itself must adapt.
Divergence between national economies may well put more strain on the eurozone, as the collapse of the housing market in Spain and mounting public debt in Italy threaten serious tensions. Indeed one major French bank warns that the interest rate spread for euro bonds might diverge significantly according to the country of issue, with the Italian and Spanish governments penalised by the market by having to pay much more for their borrowing.
We’re back to the old question: can the eurozone survive on the basis of “one policy fits all”? It has done so up to now, but there may well be speculation of members being forced to quit the euro. “No coincidence that all failed currency unions were abandoned during times of economic stress” says BNP-Paribas.
The estimates of growth for Europe’s economy are being revised down but there are reasons for some optimism. I’ve seen a timely reminder of just how important the member countries of central and eastern Europe, together with Turkey, the Middle East and Africa have become in maintaining momentum in the EU15’s economy. “Europe’s got its own China next door” says the author, Joe Quinlan from Bank of America. He sees the buoyancy of these emerging economies, both inside and outside the EU, acting as a powerful driver for Europe’s economy.
Talking of China, London’s Chatham House and the Robert Schuman Foundation have undertaken an audit of the views of Chinese policy-makers towards the EU. It is on the whole positive, but set in a long-term strategic context. One is reminded of Mao’s comment when asked what he thought of the French Revolution. “Too early to tell” he replied.
The latest Eurobarometer results give an idea of what Europeans think of the EU. It’s striking that across 27 member countries support for membership remains at its highest level since 1994, with 58 per cent seeing it as “a good thing”, against 13 per cent seeing it as bad. .
The Netherlands is way up – 79 per cent of the Dutch approve of membership, just three years after that negative referendum vote, as do 74 per cent of the Belgians and the Irish. The UK is bottom, at 34 per cent approval, with the Austrians at 38 per cent and the Latvians on 37 per cent. Nowhere do those who disapprove of membership outnumber those who approve.
Some of the most intriguing findings relate to trust. The pollsters asked respondents whether they “tend to trust” the European Commission. Across the EU one in two said yes, 26 per cent no, and 24 per cent were undecided. The Greeks at 69 per cent and the Belgians at 67 per cent felt especially trusting. France and Germany are around the EU average.
In the UK, on the other hand, only 22 per cent said they tended to trust the Commission and 47 per cent did not – far more negative then anywhere else. I can only suppose that this reflects the europhobe hostility of much of Britain’s national press.
But just as intriguing is the view that people take of their national politicians. Across the EU only 34 per cent say that they tend to trust their own governments, while 59 per cent do not trust them. In the UK 30 per cent trust their government and 34 per cent their Parliament, from which you might conclude that the British do not trust political structures wherever they may be.
For some eastern European countries like Bulgaria, Czech Republic and Romania the level of trust for EU institutions is around 60 per cent or more; for their own governments and parliaments around 20 per cent or less. The national political class is certainly finding it difficult to build confidence among voters in many parts of Europe.
