End is nigh for Euro, says Loughborough academic
The Euro is unlikely to survive in its present form and structure because of ‘fundamental fault-lines’ that have been present since it was adopted in 1999 and have recently come to the surface, according to a Loughborough University financial expert.
Professor David T Llewellyn says the Euro could eventually disintegrate unless these fault-lines are addressed. This could result in a two-tier system, with strong countries like Germany, the Netherlands, Finland and Austria going it alone and some weaker ones opting out and reviving their own currencies.
Professor Llewellyn, the new Chair of the European Banking Authority’s influential Banking Stakeholder Group, says that despite a strong political commitment to maintain the single currency tensions are building because taxpayers in the strong countries are reaching the limit of their willingness to continue subsidising the weaker economies.
Professor Llewellyn’s remarks come after a series of bail-outs to weak countries like Portugal, Ireland, and Cyprus that have put an enormous strain on the single currency.
“I doubt the Euro will survive in its present form and membership,” said Professor Llewellyn, head of Money and Banking in the School of Business and Economics.
“I don’t know when countries will leave but there are now too many fundamental fault-lines because the Euro area in its present form and structure has come to encompass countries that are too different in terms of economic performance.
“There is a lack of sufficient degree of economic convergence. I don’t see a way around this problem unless member governments face the ultimate requirement of four key characteristics: a full Banking Union with a collective bank resolution regime, far more co-ordination of fiscal policy, substantial structural reform in the economies of weaker countries, and a willingness of taxpayers in strong countries to agree to fiscal transfers of one sort or another.
“All of this, in turn, requires a significant loss of national sovereignty which some countries are not prepared to accept. What is necessary economically seems to be unacceptable politically.
“The Euro could converge on a smaller group of like-minded economies. A two-tier Euro could emerge with a strong core and special arrangements for peripheral countries.”
Professor Llewellyn said that taxpayers in some of the rich countries have had enough of bailing out the weaker ones. This is especially true of Germany, whose reunification was costly for the West German taxpayer.
He said: “What the Euro area has become is a German hegemony. Germany calls the shots because it is by far the most powerful economy, and is demanding strong conditionality for its support of weaker economies.
“The German taxpayer is now saying, ‘we have recently been through this, and have accepted the fiscal transfers that our own unification implied, but we don’t want to do it again for other countries.”
Professor Llewellyn said Britain was ‘100 per cent’ right not to join what was always a political, rather than an economic, project.
He said it was always destined to fail because of the serious fault-lines in the Euro.
He said: “It took a lot longer than I predicted for the fault-lines to be revealed, but they have now bubbled to the surface.
“Therefore, the crisis we are now seeing in the Euro is simply a reflection of the fault-lines that have always been there.
“The major fault-lines have been: a lack of fiscal discipline, the absence of a full Banking Union, and a lack of economic convergence between member economies. What we have now is fundamentally different circumstances in different member countries of the European Monetary Union.
“For any monetary union to work there is a need for transfers from the strong to the weak, because weak countries don’t have exchange rates to use to help solve some of their problems.
“In the UK we have a national monetary union and single currency and these transfers, from the strong parts to the weak parts, are done automatically through the large national budget.
“The difference with the Euro is that the weaker parts have to negotiate with the stronger parts for these transfers.
“And the stronger parts are resisting. We are getting to the stage when some countries are saying ‘enough is enough.’”