I had no idea how obviously bad the euro is.

If you take a look at history, you realise the path to the common currency is littered with consistent failures. And after each warning, the Europeans pushed a with their crackpot plan instead of abandoning it.

I once gave our readers credit for escaping the euro. You didn’t get caught up in the euphoric rush. We stuck with the pound.

But having taken a closer look at the history of Europe’s efforts to create the common currency, it now seems like a blatantly obvious decision.

It’s not like you weren’t warned about the euro’s disastrous effects repeatedly in the years before it was introduced. Every one of Europe’s disastrous currency schemes, from the currency snake to the European Exchange Rate Mechanism (ERM), failed miserably.

Still, thank you for getting the message and keeping the pound. Because it seems few others did.

The big news now is that the eurozone members are waking up to this reality too. It took them a while longer, but at least they’ve figured it out. The Italian election means even the most ignorant MEP can’t avoid the conclusion: Europeans have had enough of the euro and the eurozone.

For the first time, anti-euro rhetoric made it to the top of the polls in a national election in a major eurozone economy. Put together, eurosceptics took about two thirds of the vote. In the south, the Five Star Movement won. In the north, the League and its allies. Put together, their euroscepticism now runs Italy.

The establishment only really held Florence and some other cities. And it had to add some eurosceptic policies on to its platform to get that far.

None of this is a surprise given how badly the Italians have suffered under the euro. Their real disposable income was higher under the lira.

But how did the Italians get sucked into the euro in the first place? You’d have to be an utter ignoramus to miss the obvious consequences of joining it. Not because of some economic theory or analytical demonstration. Just look at what happened in the run-up to the currency’s launch.

At each and every step towards the euro, the system failed. And each time it did, the Europeans just took another step towards currency integration.

German economist Hans Werner Sinn summarises the constant disaster in his book The Euro Trap:

Europe’s political establishment had long set its sights on an exchange rate union. Following the Werner Plan of 1970, Europe’s governments in 1972 agreed to coordinate their exchange rates by intervening so as to make them move like a ‘snake in a tunnel’.

A binding exchange rate relative to a central exchange rate that floated in relation to the dollar was set for each currency, and a limiting band was set around it. The corresponding central banks were obliged to intervene in the currency markets by buying or selling currency in order to keep their exchange rate within this band.

The currency snake was not very successful. Most countries abandoned it, and in the end only a few currencies around the deutschmark remained.

Given the failure, Europe naturally expanded the project:

In 1979 a new attempt to keep the exchange rates under control was made with the European Exchange Rate Mechanism (ERM) proposed by French president Valéry Giscard d’Estaing and German chancellor Helmut Schmidt. With a varying number of members, it lasted until the euro was introduced.

However, in 1992 it could not withstand the strain imposed on currency markets by German reunification. Quite a number of countries devalued their currency relative to the deutschmark in proportions much higher than foreseen. In addition to intervening in the currency markets, the central banks of the countries threatened with devaluation had tried to maintain the exchange rates by raising interest rates, with Sweden even bringing its own central bank refinancing rate temporarily up to an annualized rate of 500%.

However, the speculation of financial investors put such large amounts of money in motion that the central banks were plainly powerless to stem the tide. The British pound lost 14% against the deutschmark in 1992, the lira 17%, the peseta 10%, the Swedish krona 16%, and the Finnish markka 16%. Italy then left the ERM temporarily, and the UK permanently.

The turbulences stoked the wish, in particular in France, to do away with national currencies, leading in 1989 to the so-called Delors Plan, commissioned the year before by the European Council.

Germany’s then-chancellor Helmut Kohl summarised: “Recent history… teaches us that the notion that it would be possible to sustain an economic and monetary union without political union is absurd.”

But who cares? European politicians didn’t. The euro was introduced and the eurozone economy grew least of all major regions, less than a third the global rate. And then it saw a long list of its nations go through a sovereign debt crisis.

Why is obvious. They couldn’t control their own interest rates any longer. They couldn’t devalue any longer. They are stuck.

Stuck in the euro – much worse than the ERM or currency snake

I just don’t understand how anyone can believe in the euro in the face of these results. You’d have to ignore the constant warnings as the euro system’s predecessors failed at every turn. You’d have to ignore the economic strangulation the euro has delivered. And you’d have to ignore the effect the euro is having on harmony inside Europe.

The euro was supposed to bring peace to the continent. But the economic and political strains its causing are doing the precise opposite. Sinn continues in his book:

The animosity Germany faces in western Europe is stronger than anything the country has experienced since World War II. Swastikas are being pointed at Germany in Greece, while the Italian daily Il Giornale sees signs of Germany trying to establish a Fourth Reich. Monti prophesied Italian demonstrations against Germany should the country fail to help Italy lower the premia on its sovereign debt. The British left-wing weekly magazine New Statesman said German Chancellor Angela Merkel is ‘the most dangerous German leader since Hitler’.

Even historically speaking, the introduction of the euro was hardly some sort of peacemaking measure. Just take a look at the political news at the time:

[President Mitterrand’s] comment to his countrymen that the Maastricht Treaty was even better for France than the Treaty of Versailles— indeed, a ‘Super-Versailles’.  

The influential newspaper Le Figaro crowed ‘Elle paie aujourd’hui’ (Today she, Germany, must pay), using the slogan ‘Le Boche paiera tout’ (The Jerries will pay it all) directed against Germany when it was forced to sign the Treaty of Versailles.

Sharing a currency does not make things more harmonious. Thanks to the economic pain it dishes out and the tangled mess of politics and economics it creates, you have more tensions, not less.

At the time of the introduction of the euro, the French complained about the power of the Deutschmark. German interest rate policy dominated Europe, forcing other countries to pursue their own monetary policy in reference to German rates, not independently. But joining the euro makes that worse, not better. Now they can’t pursue their own monetary policy at all.

So where to from here? Is the euro project finally running on borrowed time?

Italy’s election signals the beginning of the end

In 2011, Silvio Berlusconi held secret talks for Italy to leave the euro. On Sunday, the Italian electorate finally came to the same conclusion. They backed parties that rose to prominence railing against the euro.

One called it a “crime against humanity” and “the euro is and remains a failure.”

“It is clear in our minds that the system of monetary union is destined to end, and therefore we wish to prepare for that moment.”

“We couldn’t give a damn about bond spreads. It is ‘No’ to Berlin, ‘No’ to Paris, and ‘No’ to Brussels: Italians are going to decide for Italy from now on.”

The leading parties have since abandoned their all-out assault on the euro. But their proposed policies blatantly go against EU and eurozone rules. The Italians want to establish the primacy of Italian law over EU law, issue a parallel currency and abandon the EU’s budget rules, for example.

The idea is that abandoning the euro is a threat which will get Italy whatever it wants from the EU.

But in the end, only abandoning the euro will work. The failure of the euro is as inevitable as the failure of the ERM and currency snake. It’s only a matter of time.

Until next time,

Nick Hubble
Capital & Conflict