In the beginning there were 17 separate currencies where there is now only one, the Euro. This currency unit was set up as a result of the Maastricht treaty, which was democratically tested in Ireland by means of a referendum. The agreement, voted on and passed by the Irish people, included that the common currency would be monitored by the European Central Bank, now known as the ECB.
Monitoring means, and was always understood to mean, ensuring as far as possible the continued viability of the currency and the setting of the interest rate that would be attached to it, which affects most particularly the rate of inflation in the Euro zone and the exchange rate of the Euro against other global currencies.
Sixteen other states of the European Union have a stake in all of this. They were, and are, entitled to assume that ratification of the Maastricht treaty would mean that all member states would abide by the rules by which the common currency was set up, and that all members would accept the oversight of the ECB, which was specifically charged with that task in the Maastricht treaty.
In the olden days if a country found it had allowed its inflation rate, and therefore its competitiveness, to exceed what was prudent, its currency could be devalued either explicitly, or stealthily by market forces. This solution was not available, and was never going to be available in terms of their economic relationships with the other Euro zone states, to those countries that had signed up for the Euro.
All this was known at the outset. It was understood, or should have been understood, by the economists whose job it is to advise the finance ministers and compliance agencies in the various countries. And the same economists would not exactly need to have been qualified to the level of Nobel Prize winners to be able to come to grips with this principle.
What has now happened is that a number of member states of the Euro zone have taken their eyes off the ball to the extent that they have allowed inflation to increase well beyond the rate that has been achieved in some other Euro countries, most notably Germany, so there is now a serious imbalance in competitiveness within the Euro zone. Not only that, but a number of these same countries have either borrowed more than they can afford to repay or have allowed their banks, as in the case of Ireland, to lend too much, cause a property bubble which has burst, and then have their unsustainable wholesale loans guaranteed by the state.
These developments have a direct and serious bearing on the viability of the Euro. Default on sovereign debt by a Euro member state would be devastating for it. However, those Euro zone countries that have been able to keep their inflation rates and borrowings at acceptable levels, such as Germany, France, The Netherlands and Finland, and are now clamouring for the ECB to do its job and bring pressure to bear on these errant members to rectify the situation by living within their means and in other ways acting responsibly, are being accused of contributing to what has come to be characterised as a “democratic deficit”.
I’m afraid I don’t see it, this democratic deficit. Even when Nicholas Sarkozy lashes out at politicians in Italy and Greece in his frustration at seeing some of their number playing local political games with the Euro crisis, it hardly qualifies as an all-out attack on the sovereignty of that state. It might be a call for all concerned, even at this late stage, to live up to their legal and moral obligations as representatives of a country that freely, and democratically, signed up to the Maastricht treaty, and were happy indeed to take advantage of the very significant trading, foreign direct investment inflow, low interest rates, elimination of currency exchange overhead, reduction of exchange rate risk and the pricing transparency benefits of the monetary union that have been there since its inception, and which the prudent and compliant members would like to see continue. Instead of castigating them, we might take a leaf from their book.
Mr. Fintan O’Toole, c/o The Irish Times newspaper, please take note.
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