Running for the hills over euro

These are not the best of times for the EU. Just when we thought that the worst was over, the global economic crisis did more than just shrink the EU economy and push up the number of unemployed. It lay bare some of the EU's fault lines, especially the euro project. Our currency is now at a four-year low against the dollar and an eight-year low against the yen.

Not so long ago, we were talking about the greed of bankers and the lack of proper regulation and oversight on their doings. Now it is about the indiscretion of governments. The consequences are very serious for both the euro and the EU. Even Teutonic Angela Merkel is talking about "an existential crisis".

The basic problem with the eurozone is that, while it has a currency and a Central Bank, it has no single government. History teaches us that a currency is only as sound as the government that issues it. The 1992 Maastricht Treaty established strict criteria with regard to fiscal deficits, national debt and inflation which euro governments had to meet. The treaty clearly specified that there would be no bail-out for states facing consistent deficit problems. It was assumed that such situations could be remedied by the threat of infringement procedures and the imposition of penalties. Moreover, unlike the US's Federal Reserve System, the European Central Bank's mandate is solely to control inflation. Economic growth and job creation is not part of the ECB's mission.

Euro membership was projected to the public as a guarantee of "best practice"; then it became clear that euro governments could still manage to resort to creative accounting and doctor their accounts. When Greece's fiscal deficit for last year was revised from six per cent to 13 per cent of GDP, it triggered a confidence crisis. Initially, it was thought that a €30 billion bail-out would do the job. The EU hesitated because the Germans insisted this was against the rules. This triggered an intensive, speculative attack on the euro, which forced the EU to come up with a €750 billion debt guarantee scheme. The ECB too broke the rules when it decided to intervene in the bond market. In May, the ECB bought €35 billion in eurozone government bonds.

The euro remains a half-cooked project. Europe is now talking about the need for a "budgetary federation" that would radically improve fiscal scrutiny. This is of critical importance but not sufficient.

The so-called PIGS (the southern, euro member states) do not only have fiscal management problems but also low growth and lack of competitiveness. Their "social" economic model will come under increased pressure, possibly leading to increased social unrest and economic stagnation.

It was over-simplistic to assume that by having one currency, creating a single market and pushing cohesion funds wherever needed would lead to economic convergence. Cultural differences were ignored. Convergence will prove to be a mirage for EU members, just as economic development is for the Third World. To avoid a widening gap, Germany and friends need to stimulate economic growth in southern Europe through more imports and tourism.

It is hard to conceive a future without the euro. The EU is its own worst enemy and not speculators. The EU needs to restore trust by reaching out to its citizens.

European Council President Herman Van Rompuy is reported as having told the Daily Telegraph: "We are clearly confronted with a tension within the system, the ill-famous dilemma of being a monetary union and not a full-fledged economic and political union. This tension has been there since the single currency was created. However, the public was not really made aware of it" (May 25). There can be no trust without honesty, greater transparency and accountability.

One cannot sell the introduction of a single currency among states on the basis that people will travel across borders without having to exchange money. Many Europeans may be insensitive to some issues but they are not morons. They will surely react when something affects their standard of living. No wonder euro scepticism is on the rise, especially in Germany, where many taxpayers feel they are having to pay for the good life of others.

The surrender of fiscal sovereignty will require national government consent. It should not be rushed, hush-hush, through national parliaments. European citizens should be told all the facts and be allowed to decide for themselves. The approval of all 27 member states would be required, even though there are presently only 16 eurozone members. The new coalition government in the UK has already pledged that any further transfer of powers to Brussels will be subject to a referendum. The future of the EU can only be guaranteed through good and effective governance. EU citizens need to be empowered through better information.

Where does Malta stand in all this? Are we being told the full story? Increased fiscal oversight by the EU should be most welcome as it will put our minds at rest as to the real state of our government's finances. Our hope is that political accommodation will not continue to outweigh good governance.

fms18@onvol.net