The Consequences of Monetary Union (1972)

The financier and businessman Emmett O’Connell, formerly of Aminex and Eglinton Oil and still successfully engaged in the international mining business, has long held the view that abolishing the Irish pound and joining the eurozone was the biggest policy error ever made by the Irish State. The Greek crisis and its drastic implications for the euro-currency, interwoven as it is with the crisis of the Irish public deficit and banks, seems to be confirming this daily before our eyes.

Linked below for your information is a facsimile of a pamphlet☚ which Emmett O’Connell wrote in 1972. It sets out why joining a European currency union would not be in Ireland’s best interests.

[Also linked below: a Podcast audio extract☚ of an interview with Mr. O’Connell by George Hook on this subject, on NewsTalk106fm, Monday 10th of May]

This was one of a number of pamphlets published at the time by the Common Market Study Group, of which the undersigned, the late Raymond Crotty and Mr Micheal O Loingsigh of Tralee were key members. The Common Market Study Group was the principal centre of intellectual criticism of Irish membership of the EEC in the Accession Referendum of May 1972. Central to such criticism was the belief that what was then called the Common Market was intended to lead on to a European Monetary and Political Union under the political hegemony of what Dr Garret FitzGerald recently termed “The Big Three” EU Member States – Germany, France and Britain – as has broadly been happening since.

Emmett O’Connell repeated his criticisms of EMU at the time of the 1992 Maastricht Treaty which led to the establishment of the euro and he has written occasional press articles on this and related economic topics over the years. The core of his argument is the section of his pamphlet setting out “The case for Sovereign Money” on pages 12-14, as well as pages 22-26. The validity of what he wrote then, he believes, is confirmed by the current crisis of the eurozone and the fact that Ireland is unable to restore its lost economic competitiveness because of the abolition of the Irish pound and with it our ability to have any control over either the currency exchange rate or interest rates with a view to maximising Irish development and employment.

The real costs of eurozone membership

The article below from the Financial Times points to the lack of public debate across the EU on the real implications of the 1992 Maastricht Treaty’s proposal to abolish national currencies and replace them with the euro.

In Ireland’s 1992 referendum on the Maastricht Treaty the main thrust of public debate was on the Abortion Protocol attached to that Treaty.

There was virtually no discussion of the economics involved, apart from the fact that it would make it easier for Irish tourists to go on holiday on the continent and that it would give us permanently low German-level interest rates! The latter in due course helped impel our early-2000s borrowing binge.

The article mentions Professor Albrecht Schachtschneider and his colleagues, who launched a constitutional challenge to Germany’s ratification of the Maastricht Treaty at the time. This led to the Court’s well-known Brunner judgement, which laid down the constitutional principles governing Germany’s adherence to Economic and Monetary Union.

My colleagues and I had the pleasure of welcoming Professor Schachtschneider when he came to Ireland last September to show solidarity with those urging a No vote to the Lisbon Treaty.

We wish him and his colleagues every success if they now take action in the German Constitutional Court against the breach of the EU Treaties which a financial bail-out of Greece or any other EU State in face of the current bond-market crisis would constitute.


http://www.ft.com/cms/s/0/bff9757a-522d-11df-8b09-00144feab49a.html
Greek crisis begets a German backlash
David Marsh
Financial Times
Wednesday 28 April 2010
(The writer is senior adviser to Soditic-CBIP LLP, chairman of SCCO International and author of “The Euro – The Politics of the New Global Currency”)

When Josef Joffe, then foreign editor of the German daily Süddeutsche Zeitung, wrote a 4,000-word essay in December 1997 attacking the planned formation of the European single currency, he published it first in English, in the New York Review of Books. “Never in the history of democracy have so few debated so little about so momentous a transformation in the lives of men and women,” noted Mr Joffe. As if to confirm his point, the article appeared in an abridged German translation in the Süddeutsche Zeitung more than a month later, unobtrusively buried in a weekend supplement.

The episode illustrates past barriers to plain speaking about economic and monetary union (EMU). Many ordinary Germans always feared the euro would be less stable than the D-Mark. Yet, reflecting postwar belief that German interests ineluctably overlapped with Europe’s, there was little discussion of the risks. This went beyond Germany. One senior Dutch central banker, now retired, says most European governments – including his own – agreed the Maastricht treaty 20 years ago without understanding what they had signed into law.

In April 1998, Germany’s parliament voted through the euro with only minimal opposition. Now, the German-in-the-street is making up for lost time…

There is an air of déjà vu… four German professors who launched an unsuccessful anti-euro lawsuit at the constitutional court in 1998, are preparing fresh legal action. Their claims of infringements to the EMU rules, in particular over the “no bail-out clause” preventing joint payment of weaker states’ debts, have a much greater chance of success this time.

As Greece approaches a possible debt restructuring and even a euro exit, questions are due on why warning signals went ignored that weaker eurozone countries were building up unsustainable borrowings…

[…]

Inadequate discussion of the eurozone’s problems has been particularly acute on the issue of whether monetary union required political union. Both the Bundesbank and Helmut Kohl, the former German chancellor, suggested in 1991 that without political union, EMU would eventually fail… In 2006 Otmar Issing, former chief economist at the Bundesbank and then the ECB, said monetary union “can work and survive … without fully fledged political union”. Now Mr Issing says: “In the 1990s many economists – I was among them – warned that starting monetary union without having established a political union was putting the cart before the horse.”

Leading German figures never explained that large deficits in countries such as Greece would eventually impinge on Germany’s own finances. Germany, the main surplus country, has inevitably become the largest creditor of the eurozone’s heavily indebted peripheral nations. As Mr Issing said in 1999, the no bail-out clause was meant to prevent the “negative external effects of national misbehaviour” from spilling over elsewhere. In fact, German taxpayers will have to pay for Greece: directly, through emergency government loans; indirectly, through supporting German banks that will be hit by a Greek debt restructuring; or, conceivably, both.

This is one of many costly facts about monetary union now bursting disagreeably to the surface.

⁂ European Central Bank capitulating in face of crisis

Two similar articles from newspapers on the political Right and Left forwarded for your information by Anthony Coughlan:

TELEGRAPH
Tuesday 24.2.09

ECB faces mutiny from national bank governors as recession deepens
– The European Central Bank is capitulating.

By Ambrose Evans-Pritchard

For months the ECB held sternly to the high ground of orthodoxy as the US, Japanese, British, Canadian, Swiss and Swedish central banks slashed rates towards zero and embraced quantitative easing, but a confluence of fast-moving events is now forcing it to move.

The credit default swaps that measure bankruptcy risk on the debts of Ireland, Austria and a clutch of Latin Bloc states have vaulted to dangerous levels. In the case of Ireland, the slump is spilling on to the streets. Some 120,000 marched through Dublin over the weekend to protest austerity measures.

The slow fuse on Eastern Europe’s banking crisis has detonated, leaving Austrian, Belgian, Italian and other West European banks with $1.5 trillion (£1 trillion) in exposure.

It is happening just as industrial output collapses in the eurozone’s core states. Germany’s economy contracted at 8.4pc annualised in the fourth quarter. ECB president Jean-Claude Trichet said on Monday that “a process of negative feedback” has set in where the banks and the real economy are pulling each other down in a self-reinforcing spiral. Eurozone credit is contracting. Banks are rationing credit as deleveraging gathers pace.

Rob Carnell, global strategist at ING, said the ECB has been painfully slow to acknowledge the global deflation tsunami sweeping across Europe.

“It seems divorced from reality. It is clearly nonsense to talk about inflation now: it has been negative on average for six months. The eurozone purchasing managers’ index has fallen twice as fast as in the US, so the ECB should be acting even faster than the Fed,” he said.

Mr Trichet said the ECB has increased its balance sheet by ¤600bn (£525bn) since the Lehman collapse in September. The bank is providing “unlimited liquidity” in exchange for a wide range of collateral, including mortgage bonds issued for the sole purpose of extracting ECB funds.

But the ECB’s leading voices have adamantly refused to contemplate going to the next stage: buying bonds and other assets with “printed money”. They see that as the Primrose path to hell. This week the tone has abruptly changed, suggesting that a majority of the 16 national bank governors on the ECB council are having second thoughts.

The apparent ring-leader is Cypriot member Anastasios Orphanides, a former Fed official and a world authority on deflation traps. He said on Monday that the ECB may have to go beyond “zero-bound” rates and revealed that an “internal discussion” was under way.

Italy’s Mario Draghi is in the “activist-easing” camp. “The experience in the US in the 1930s and Japan in the 1990s suggests that it is necessary to fight, in the early phases of the crisis, the tendency for real interest rates to rise,” he said.

Finland’s Erkki Liikanen is of the same opinion. “We are facing the worst financial crisis in our time. It is important not to exclude, ex ante, any measures.”

Julian Callow from Barclays Capital said 10 ECB governors are now doves.

This amounts to a mutiny against the Bundesbank-dominated executive in Frankurt. It is no great surprise. They have to answer to their democracies. The plot is thickening.


The Euro, an Illusory Shield against the Crisis ?

L’Humanite, Paris , Thursday 19 February 2009,

by Isabelle Metral (Translated)

Most political leaders of euro-zone countries make it sound as though the single currency has shown its capacity to play a protective role as the financial crisis sweeps across the Old Continent. So much so that today, even the staunchest of the Euro-sceptics (the British, Icelanders, Swedes, or Danes) are supposed to have suddenly realized the advantages of joining the euro…

The claim was made by Joaquin Almunia, European commissioner for economic and monetary affairs, on Tuesday last.

The EU leader’s statement actually betrays a growing concern in the face of signals showing increasing divergences between the different regions or countries of the euro zone. These divergences might eventually lead some countries to consider opting out of the single currency.

The crisis shows up the very serious defects in the original conception of the euro.

Entirely obsessed as they were with the stability criteria put forward by financial markets, those that championed its creation in 1999 were aiming first at a “strong euro” in the hope of luring as much capital as possible to the European market.

Hence the curb on public spending (with the Maastricht treaty), the pressure on wages through the deregulation of labour markets that diminished labour’s negotiating power. “The euro has brought war over exchange rates to an end, but it has exacerbated competition over prices,” rightly claimed Jean-Paul Fitoussi, president of the Observatoire français des conjonctures économiques

Today, the deepening crisis and the effect of the competition between states that sink deeper and deeper into debt have the additional effect – a refinement on the earlier stages – of bringing the pressure of competition to bear on the States’ capacity to meet their debts (in treasury bonds).

Indeed, if euro zone countries are united by the single currency and the European Central Bank, the rates at which they get loans, and the conditions attached to them, vary from one country to the next. Before the crisis, the spreads remained quite limited. But with the plunge into recession, and the gigantic assistance granted by the various states through bank bail-outs or economic stimulus plans, this is no longer true.

Spain and Ireland, for instance, which until a short time ago, were still praised as models of economic success by pro-marketers in Brussels and elsewhere, are now going through a period of fierce turbulence. As a result, they are at a disadvantage on financial markets and find it difficult to raise money.

Sovereign loans in the euro- one consequently tend to be widely spread. The risk premiums demanded from the frailest countries are soaring, unlike those demanded of Germany, which is still considered an exemplary borrower. The benchmark rate for German (Bund) loans over 10 years last Monday stood at 2.98%, much lower than that of France (3.50%), or of Spain (4.13%) or, above all, of Greece (5.47%).

The over-rated credit rating agencies were not slow in down-grading Madrid and Athens. Downgrading a state amounts to casting suspicion on its ability to pay back its debts as settled, in the best conditions.

In such circumstances, some countries that are strangled by the service of an increasingly heavy debt might be tempted simply to leave the euro ship. To ease the stranglehold, they might try devaluing their restored national currency as a last resource, in order to boost their exports.

This prospect has made the fortune of the managers of the Intrade site where, for the last few months, it has been possible to bet on one or several of the sixteen euro-zone countries opting out of the euro. The contract expires at the end of 2010.

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