May 28, 2012 / 5:27 PM / 7 years ago

Euro's long-time doubters say 'I told you so'

LONDON/FRANKFURT (Reuters) - They were dismissed as prophets of doom. Now, as the euro struggles to survive, long-standing critics of Europe’s single currency are more like prophets in their own time.

But when they say ‘I told you so’, many do so with a regretful shake of the head, knowing the chaos and contagion that could ensue if austerity-weary Greece, at the epicentre of the crisis, quits the euro after a new election next month.

“I feel a deep sorrow that things could develop like they have in the euro zone considering that the fundamental mechanisms at play now were there for everybody to see,” said Leif Pagrotsky, a former Swedish trade minister.

He said it had been obvious to him from the outset that a single interest rate for 17 countries with different inflation rates was a recipe for real estate bubbles and banking crises.

Similarly, a single-currency area without central decision-making or fiscal transfers and coordination of budgets - political union in short - was bound to lead to trouble.

“The sadness is that, in spite of that, this was allowed to happen. Millions and millions of people are suffering. The European cooperation project is suffering, and a crisis of legitimacy has resulted,” Pagrotsky, a senior member of Sweden’s opposition Social Democratic party and one of his country’s most prominent eurosceptics, told Reuters.

Swedes emphatically rejected the euro in a plebiscite in 2003, and for Pagrotsky the matter is closed. “I don’t think Sweden will join. We had a referendum and the people said ‘no’, and I think that’s it,” he said.

Euro zone leaders, who met on Wednesday in Brussels for yet another inconclusive summit on the two-year-old crisis, will eventually take steps towards closer coordination of fiscal policy, Pagrotsky believes.

And, for all his reservations about the construction of the euro, he expects the currency to survive - with a question mark next to Greece.

“I’ve always thought Greece would remain in the euro, because the will to stay together is so strong and the political capital invested has been so enormous,” he said. “But the rhetoric has changed, and there seems to be a game of chicken. So I’m not so sure.”

HORROR WITHOUT END

If it was up to Wilhelm Noelling, an anti-euro economics professor at the University of Hamburg, Athens would be ushered to the exit forthwith.

Greece and the rest of the euro zone have no rational future unless they can reclaim control of their own currencies, said Noelling, one of a clutch of eurosceptics who filed a case last year with Germany’s constitutional court arguing that bailouts for Greece and other countries violated German law.

“If we go on with this policy, then what’s going to become of Europe in a year or two?” he asked. “I’ve said for a long time that an end with horror - and it would be an end with horror - is better than a horror with no end, the horror that is now ahead of us for the unforeseeable future.”

Noelling, who sat on the Bundesbank’s council from 1982 to 1992 in his capacity as head of Hamburg’s regional central bank, said fears of contagion from a Greek exit were vastly exaggerated by those unable and unwilling to imagine an alternative to the euro.

“Europe’s politicians don’t want to look beyond the end of their nose,” he said.

Citing U.S. theologian James Freeman Clarke as saying ‘A politician thinks of the next election. A statesman, of the next generation’, Noelling added: “Today we need statesmen more than ever, and if it’s statesmen making the decisions here and now, then Greece’s exit must begin immediately.”

Paul De Grauwe is also an economics professor, at the London School of Economics, but he is less sure of Greece’s fate.

When the decision was made to go ahead with the euro 20 years ago, De Grauwe argued that monetary union had to be embedded in a political union. He still calls himself a skeptic, but, since the currency was launched in 1999, he has concentrated on practical proposals to remedy its shortcomings.

“They didn’t know what they were doing when they started this thing, and I’m afraid they still don’t know what they’re doing,” De Grauwe said. “But if it collapses, it’s going to be hell. It was relatively easy to enter; it’s going to be much more traumatic if it breaks up. So let’s try to avoid it.”

DEFAULT AND STAY

De Grauwe expects Greece to default, at least partially, on its official-sector debt: “That seems to me to be inevitable. They would be foolish if they were to continue to pay that. The burden is just unsustainable.”

But default need not lead to Greece’s quitting the single currency, as long as the European Central Bank does not turn off the money taps to Greek banks, De Grauwe argued.

On balance, he thinks Greece will stay in the euro. He is far from certain, however. “I find it extremely difficult to predict how the Greeks themselves will react,” he said.

De Grauwe’s constructive criticism has irritated officialdom down the years.

After attending one European Commission meeting in the early 1990s for a report to trumpet the gains the euro would bring, De Grauwe said he and other skeptics were not invited back.

“The idea that you needed a political union, up to just recently, wasn’t taken seriously. Now everyone is saying this,” he added. De Grauwe, a Belgian, also suspects his views doomed his candidacy for the ECB’s Executive Board in 2003.

Some of his warnings seem chillingly prescient.

In a Financial Times article in 1998, he sketched out how a single interest rate and the elimination of exchange rate risk could send Spanish real estate prices soaring. “After the boom comes the bust. Asset prices collapse, creating a crisis in the Spanish banking system,” he posited.

The 1997-1998 Asian financial debacle, he argued, had shown the danger of excessive debt accumulation by the private sector. “This has escaped the attention of the founders of EMU, concerned as they were by the dangers of too much government debt,” he wrote 14 years ago.

Sure enough, Spain entered the 2008 financial crisis with low government debt of around 40 percent of GDP. But, with house prices tumbling and the economy in recession, weakness in the private sector has caused Spain’s public debt to nearly double and many banks are drowning in bad loans.

OSTRACISED

De Grauwe did serve for a time on a panel of external economic advisers to European Commission President Jose Manuel Barroso, but he is now out in the cold. “Since the crisis, I do not remember a single politician asking my advice,” he said.

Economist Ruth Lea, a long-time British critic of the single currency, also knows what it is like to be on the outside.

She recalls how she was heard in stony silence at a Dublin conference in 1993 when she outlined her doubts about the euro.

“They did not want to hear. It was almost a thought crime,” said Lea, economic adviser to the Arbuthnot Banking Group in London.

She said the only way out of the crisis is for the euro zone to go down the path of fiscal union, entailing a single ministry of finance, mutualised sovereign debt - euro bonds - and major budgetary transfers from richer to poorer euro zone members.

“In other words, political union - hard, fast political union as you have in the United States or the UK,” Lea said.

“None of this is rocket science, which is why I find this so frustrating. I’ve waited twenty years for this, but I’m not happy to be proved right. We will all suffer.”

Editing by Alastair Macdonald

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