The Greek parliament has today voted to accept the government’s austerity package, which includes deep spending cuts and wide-ranging tax increases amounting to 28 billion euros. This will enable the Greek government to borrow a further 12 billion euros – the next tranche of the estimated 120 billion euro IMF/Euro-area bailout – allowing Greece to pay off its debts until at least 2014 and avoiding bankruptcy. This may settle the markets, and see the euro rally, but many are asking just how long European currency union can survive in its current state. The original rules for sovereign debt ratios were drawn up by the ‘father of the euro’, German Finance Minister Theo Waigel, and formalised in the European Stability (and Growth) Pact. The Stability Pact was seen as central to successful monetary union and the effective implementation of the Maastrict Treaty (1992). The Treaty laid down the criteria for the convergence of European economies, and hence defined the eligibility for euro membership. It was argued that, without stability, the euro would be a ‘soft’ currency, and a soft currency meant only one thing – inflation, quickly followed by an erosion of European competitiveness in world markets. The stability rules meant that annual debts could not exceed 3% of GDP, and accumulated debts could not exceed 60% of GDP. One by one euro-area countries broke the rules, with, today, only Finland of the Euro-17 passing the ‘euro-test’. Pressure in the system has been building for many years, but it was the banking crisis that exposed the problem, and the inherent weaknesses of the euro-system.
There is, clearly, a the lack of significant convergence between the more developed northern European economies of Germany, France, and the Benelux countries, and those of Greece, Portugal and Spain. Many of the economic indicators that have been ‘allowed’ to diverge in the name of stability – namely unemployment, income per head, and inequality, have done just that, widening the gap between the ‘rich’ north and the ‘poor’ south. The real issue is, are the dwindling positive effects of convergence and sharing a currency now cancelled out by growing negative effects? As Greece experiences a 48 hour strike and riots in the streets, some may be reminded of William Jennings Bryan’s famous ‘Cross of Gold‘ speech in 1896 when, at the Democratic National Convention he urged ‘thou shall not crucify the working class on a cross of gold’. For gold, substitute the euro?