Backward Roll for the Euro

Article excerpt


THE honeymoon accompanying the launch of euro notes and coins is over. Now the people of Europe and the policymakers are having to face up to the reality.

The picture is not very reassuring. Many of the same structural factors which have led to economic sclerosis in euroland mean that the efficiencies claimed at the time of the launch of the notes and coins are not being achieved.

This is quickly feeding into the currency markets, where the rally is turning into a rout with the euro close to its lowest point this year at 88 US cents.

All this is underlined today by Patrick Lenain of the OECD economics department. He points out that the euro's street debut has been followed by a jump in the price of goods, has done nothing to remove costly bank charges for cross-border transactions within euroland, and is not increasing price transparency.

Manufacturers discourage crossborder purchases, because they are able to achieve better profits

in national markets. Before the economic benefits of transparency can be achieved, regulatory reforms will be needed to speed cross-border trade.

This has been difficult enough in an EU of 15 nations. It boggles the mind to think how it would be in an enlarged EU which includes economies as different in their needs as Latvia and France.

Euroland has afforded countries a degree of certainty in the currency markets, even if it meant submitting to a 25pc devaluation against the dollar. But as the OECD points out, it also has brought distortions.

Shocks such as an increase in oil prices play very differently across the EU. France has an inflation rate of 1.3pc against 5pc in the Netherlands.

Similarly there are

big divergences in growth levels with economies such as Ireland 'overheating' up to recently.

Of itself, the OECD observes, the single currency has done nothing to improve economic integration.

Huge sectors of euroland are protected by national barriers, including banking and energy - which explains why cross-border bank mergers of the kind desired by Lloyds TSB have been all but impossible. Nor has the euro yet become a reserve currency of choice.

Until Europe's political masters tackle underlying problems of cumbersome regulation, rigid labour markets and high operating costs, the single currency will do nothing to improve Europe's financial cohesion. …