Be careful what you wish for. The euro’s founding fathers dreamt of a superpower currency to match the dollar, freeing Europe from US monetary hegemony. Charles de Gaulle grumbled that America enjoyed an “exorbitant privilege” as holder of the world’s reserve currency, able to get away with murder. Now they have one themselves, only to discover that it is a curse.
China’s central bank has been buying fistfuls of euros as it accumulates a world record $3.7 trillion in foreign reserves, and its motives are not entirely friendly. So have the central banks of Russia, Brazil and the Middle Eastern oil sheikhdoms, all aiming to cut reliance on the US dollar, part of a $9 trillion surge in reserves leaking, with tidal force, into the euro.
In China’s case, it is deliberately driving down the yuan to capture export share. You could say China is exporting excess manufacturing capacity to Europe, or, in plain talk, exporting unemployment.
This is why the euro has long been too strong for its own good. It surged a further 9 per cent against the dollar from June to early October, before hitting the wall this week. It has risen 28 per cent against the Japanese yen in a year. This is a bizarre state of affairs for a currency bloc struggling out of recession. Weak prospects normally mean a weak currency, but there is nothing normal about Europe’s monetary union.
The euro exchange rate is far too high for two-thirds of the euro states, a key reason why unemployment hit an all-time peak of 12.2 per cent in September. It is pushing Europe’s crisis states into Thirties-style deflation, making it almost impossible for Italy, Spain and Portugal to dig their way out of debt.
EMU-wide inflation fell to 0.7 per cent in October. Yet this is only half the story. Once austerity taxes are stripped out, prices have been falling in 10 of Euroland’s 17 states over the past four months, including Italy and France. They are one shock away from outright deflation.
France’s industry minister, Arnaud Montebourg, asks why Europe is letting the euro stay so high, alone in refusing to protect its societies while others steal a march. The US Federal Reserve and the Bank of England have nudged down their currencies by printing money. The Bank of Japan has carried out a devaluation putsch. The Swiss have trumped them all, printing à outrance to cap the franc. “Every 10 per cent rise in the euro costs France 15,000 jobs. Britain, the US, Japan, all have a strategy of monetary stimulus, but in the EU we have nothing but hard money. The currency doesn’t belong to bankers, and it doesn’t belong to Germany, it belongs to all members of the eurozone,” Mr Montebourg said.
A Deutsche Bank study said the euro “pain threshold” for Germany is $1.79. It is $1.24 for France, and $1.17 for Italy. It ended last week at $1.35 to the dollar. This means Germany is sitting pretty, and it dominates the policy machinery. Meanwhile, Italy screams with pain, its industrial output still 26 per cent below its 2008 peak. Italy’s EU commissioner, Antonio Tajani, warns of “a systemic industrial massacre”.
The north-south split has many causes. Germany sells machines and prestige cars with a fat profit margin. “Club Med” (the south) competes lower down, against China. Yet it is also because Germany screwed down wages in the early years of EMU, gaining 25 per cent in competitiveness against its peers. How this happened is an old story. But the consequences are toxic, so toxic that François Heisbourg, French head of the International Institute for Strategic Studies, is calling for the euro to be “put to sleep” in order to save the European project. “We must face the reality that the EU itself is now threatened by the euro,” he said.
Mr Heisbourg is pro-Europe. His point is that conflicting narratives of the crisis are emerging, pitting creditor and deficit states against each other. He compares them to the black legends after the First World War, when twisted views fed an ideological backlash, and fears that it will end in “a nervous breakdown and an uncontrolled disintegration of the euro”.
This year’s euro surge has brought that closer. The European Central Bank can force it to back down any time by ending its contraction policies, and switching to reflation. The ECB’s Club Med governors act like rabbits in headlights, frozen as the juggernaut hurtles over them, unwilling to say “boo” to the German Bundesbank.
We will find out this week if they are at last willing to take charge of monetary policy and avert disaster. If they recoil, the euro will push back up again and they may as well sign a deflationary death sentence for southern Europe.
Ambrose Evans-Pritchard is International Business Editor of The Daily Telegraph. He has covered world politics and economics for 30 years, based in Europe, the US, and Latin America.