To understand today’s problems with the Euro currency, we should go back 25 years to the European Exchange Rate Mechanism, the ERM.
The intention of the ERM was to bring the various national currencies of the EU member states into alignment, preparatory to the launch of the Euro currency. Currencies were to be maintained within a 6% + or – margin of the notional norm. The framework itself was notional but believed to be necessary to achieve the convergence of the different national currencies.
Britain joined the ERM in 1990, but in 1992 her currency, the £ Sterling came under sustained pressure on the international money markets. The ERM itself provided the conditions for speculators to attack currencies; and to keep Britain in the ERM the UK government had adopted measures which had the secondary effect of harming employment.
On ‘Black Wednesday’ – September 16th – the British government raised interest rates to 12%, then to 15% to try to stave off the falling value of Sterling on the Markets. The UK Government spent virtually all the UK’s foreign currency reserves trying to keep the value of sterling from falling below the mystical -6% margin of the ERM. All to no avail.
The British government had even gone as far as to plead with the German Central Bank to intervene and buy £ Sterling on the money markets in order to maintain the UK currency in the all important ERM, preparatory to Euro currency membership. The Germans refused.
The upshot of continued selling of Sterling was that Britain breached the ERM margin and fell through the critical ‘floor’. The cost had been phenomenal, if not unprecedented. The British – typically – had done all they could to keep their agreement to become part of the Euro currency. They failed, and Britain exited the ERM and therefore participation in the Euro.
Less than a year later the French currency, the Franc, came under similar pressure on the markets.
This time the reaction was different.
The ERM margins were relaxed to allow France to continue to remain in the mechanism and therefore qualify for the coming Euro. The margins were ultimately relaxed to 15% !
This sort of logic is typically French. The constraints become inconvenient for the ultimate aim so just change the terms. This is not my fancy. Former French President Valery Giscard D’Estaing says precisely this in his Autobiography when he compares French and ‘Anglo-Saxon’ mindsets.
Britain could be allowed to fail, not France. This is further evidence of the Franco-German Axis which is the true inspiration of the EU project.
But our story does not end there.
Come the time to discuss the realities of the Euro, the British proposed that the Euro should be a Common Currency, circulating alongside national currencies. The French and others maintained the concept of a Single currency only, replacing the national currencies once and for all. They won the day – but not the argument !
The two approaches exemplify the two different mindsets – the British,· and the continental French. The British is pragmatic, practical – concerned that the thing works in practice. The French is radical, dramatic, immediate and total. All obstacles to the objective are to be simply pushed aside – which is in fact what happened: when the Euro was finally introduced, no nation fulfilled the requirements !
Experience has shown that the British view was right, and the French wrong. We only have to look at Greece, for example, to see the damage that has been done by a one-size-fits-all currency. Greece has suffered, economically, politically and socially with lasting effects on the ownership of her national assets.
With the Single currency there is no room for manoeuvre. A country like Greece was tied into a currency suited to the high performing German economy. The straight jacket effect was obvious.
Had the Drachma survived, the Greek economy would not have been tied into an overvalued currency; the Drachma would have floated to an appropriate level against all others, and against the Euro itself. There would have been flexibility in the system. The Drachma would have fallen in the classic way to rectify its value, leaving Greek exports cheaper and more competitive. Thus her recovery could have commenced.
No such flexibility exists in the Euro Single currency and the exacting requirements of the Eurozone to bail out Greece have had an even greater detrimental effect. [Bailout number 4 is in prospect.. ].
The UK was fortunate. It found out the true price and the true pole of power in ‘Europe’ back in the days of the preparatory ERM. The damage was impressive, but contained. For the Greeks, the damage is unbearable and ongoing.
Such is the harmonising effect of continental thinking in the EU project.
Britain’s unique cultural and philosophical perspective has been rejected out of hand. It has been required to submit to the continental which claims superiority over all others – it cannot therefore be questioned or gainsaid.
This strikes me as the mentality of war, not peace where people appreciate their differences and take what is valuable from each other’s ways, blending them to achieve a new and stronger whole.
Tant pis, as the French say.