The euro's survival 'requires political union'

Protester burns a euro note

Creating the currency union was not a random act of collective economic suicide, but was in some senses a rational or even noble project that was either premature or too late. The tragedy was that a succession of post-war leaders, whose intentions would be seen by many as honourable, made a series of disastrously ill-timed decisions.

Here is a great paradox: the big decision to press the button on creating the euro was a French attempt to shackle the economic and political power of a unifying Germany, but it has had the perverse consequence of reinforcing German power within the eurozone and the European Union.

A film on this subject which I've made with the producer John Thynne tries to shed light on the gravity of the mess they (and we) are in now - and what may be required for the eurozone to survive in the longer term.

If you had any doubts that we were minutes away from financial and economic catastrophe before Christmas, the European Central Bank does not.

"In the autumn of 2011, the conditions were very dangerous," one of its executive directors, Benoit Coeure, told me. "European banks were facing severe difficulties to fund themselves, to access finance, and we were very close to having a collapse in the banking system in the euro area, which would have also led to a collapse in the economy and to deflation. And this is something that the ECB could not accept."

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So the ECB put 800 European banks on life support, by providing more than a trillion euros of emergency three-year loans to them. As Mr Coeure concedes, this so-called LTRO is a temporary prop, not a solution to the euro's ills.

"It is a pain-killer, a very powerful one... This period of calm has to be used by governments to fix the underlying issues, the fiscal (deficit) issues and the competitiveness issues that European countries are facing."

Since I saw Mr Coeure a few weeks ago, the calm has evaporated. There are escalating fears that Greece will leave the euro - and that the ensuing turmoil will force a more serious fracture of the currency union.

Benoit Coeure says the ECB "saved" Eurozone banks

The big indebted economies, Spain and Italy, look considerably weaker, their economies shrinking, and unemployment rising. The borrowing costs of their governments are soaring once more, a sign that investors are growing concerned again about the health of their public finances and of their banks.

What is required is a tremendous collective effort by the eurozone's members. In practice, this is widely seen to need a greater willingness by Germany to deploy more of its fearsome financial resources to help the weaker economies, such as Spain and Italy, in their period of painful transition.

Start Quote

The average lifetime of a currency is limited, except when it is a great state with an endlessly long, beautiful history”

End Quote Helmut Schlesinger

But a sharing of the debt burden requires near revolution in the way the EU is governed, according to a trio of the grand old men of Europe.

"The crisis makes at least one thing obvious and that is we need more of Europe, we need the political union as the only way to save the stability of the euro," the former German chancellor, Gerhard Schroeder, said.

Given that his party, the SPD, could well be in power again next year, we may well see progress towards this political union.

One of the great figures of global central banking, Jean-Claude Trichet - president of the European Central Bank during many of the euro's formative years - made a similar point. "In a single market with a single currency… it seems to me that Europe could go for a federation."

Without such a federation, can the single currency survive, I asked Helmut Schlesinger, another influential central banker who has seen the odd financial crisis at close quarters and was president of the Bundesbank when sterling was forced out of the European Exchange Rate Mechanism in 1992.

"I cannot make any long-term predictions in this regard," he said. "One should consider that monetary unions, or more precisely, coin unions, have survived for a long time, but never for more than three or four decades.

One euro shop in Greece There are fears Greece may ditch the euro

"My personal experience with the German currency is that it has undergone changes at three occasions during my lifetime. When I was born, it was changed into the reichsmark. When I began to work, it became the deutsche mark. And when I became a pensioner, it became the euro.

"The average lifetime of a currency is, as you can see, limited, as a rule, except when it is a great state with an endlessly long, beautiful history, from the kings of the Middle Ages until the Queen nowadays. Then you have got a long monetary history."

But in Europe, that is not the case. "And I would say that either we get the United States of Europe, that is an actual political union, and then that political union gets its own currency. But then it is no monetary union any longer, but the currency of that new state.

Start Quote

We need the political union as the only way to save the stability of the euro”

End Quote Gerhard Schroeder

"Or let's stay with the current situation which we find ourselves in at the moment, and then it could be that this monetary union will not necessarily dissolve, but change, extend, scale down. I do not know. My horizon, my prognosis is very limited in time."

So what is going to happen: creation of the European superstate and survival of the euro, or a disastrous monetary and political disintegration? I hope Thursday's programme will give you the information you need to form a judgement on will determine not just the eurozone's future prosperity but Britain's too.

The Great Euro Crash with Robert Peston is on BBC Two at 21:00 BST on Thursday 17 May. Watch online (UK only) via iPlayer at the above link

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 143.


    'Will the eurozone crisis effect the London Olympics? Specifically the men's 100m Final'

    Yes it is going to be changed to the 100m run on the banks.

    Here you go

  • rate this

    Comment number 142.


    Hmmm, a bit of Utopian thinking, Comrade. You and AfA can only be commended for your faith in human nature :-)

    Show me the nation that abhors violence as part of the culture. And I don't mean nice theory/religion - show me where it works in practice and over a long period of time rather than as recent, untested, phenomenon.

  • rate this

    Comment number 141.

    While I don't agree with your conspiracy theories I agree the UK will have to hold a referendum. The stark choice will be join and prosper or stand aloof and forever be the poor beggar begging for scraps under the table. As the car plants and aeroplane plants move to the mainland and the COL looses it's privileged access to Europe that's about the how I would think it would play out.

  • rate this

    Comment number 140.

    The EURO is the common currency that was set up to make a giant step towards 'The Federal States of Europe' where all countries give up their sovereign rights to be pupets of Brussels.
    I do not believe the majority of the citizens in Britain, France, Holland, Italy, Spain etc want this.
    Get back to a trade only body and trade with the countries in europe as we do with countries world wide.

  • rate this

    Comment number 139.


    A Federal Europe would require a vote in favour by around 500m people in some 25 nations ...
    I agree with your post - except that '_should_ require a vote' would be more accurate.

    I expect the EU to go ahead with federalism without democratic mandates. They've been doing this for decades; why would we expect them to behave better now?

  • rate this

    Comment number 138.

    115: Everyone is being undercut by China at the moment. Making it almost impossible to have a balanced economy, as under the freemarket, Chinese exports always win.
    This means those who would be gainfully employed manufacturing, cannot be, as the rigged exchange rates make them unprofitable.
    This situation plays into the hands of those who would like 19th century labour laws. Cheap servants !

  • rate this

    Comment number 137.

    When there's overproduction the law of value acts by creating a recession (less commodities produced) & so causing debts to go unpaid.
    For banks this means insolvency problems.
    Trying to save them by creating more token money just shifts the debts from commercial banks to central banks who in turn will try & avoid insolvency by creating more token money until the world's currencies are debased.

  • rate this

    Comment number 136.

    Will the eurozone crisis effect the London Olympics? Specifically the men's 100m Final.

    I managed to bag a couple of tickets for the final, and I really don't want to miss out on this amazing opportunity.

    I'm sooooo excited!!! Did anyone else manage to get tickets???

  • rate this

    Comment number 135.


    I do not want to be part of a Political Union with Germany and France - which is why I have always objected to the lack of a referendum from Thatcher onwards

    Can you explain to the ignoramus from the other side of the Pond why citizens of the democratic country cannot get such a referendum, although so many of them are visibly and audibly clamouring for one?

  • rate this

    Comment number 134.

    Political union? Unfortunately the word political now denotes an elite telling the rest of us what is best for us, with the evidence proving the exact opposite.

    No what we need is democratic union.

    Where people look out for each other regardless of what the politician prescribe. Politicians are being led by banks and big business to proscribe what benefits the elite. Not us. This is wrong.

  • rate this

    Comment number 133.

    A European Federation would inevitably involve a federal government able to impose fiscal policies across the union, much like the US. However, such a union in the US has still required the federal government to effectively 'bail-out' various states. Given the current fiasco in Europe, I doubt whether many richer European voters would vote for such measures to save their poorer cousins.

  • rate this

    Comment number 132.

    Once you get away from marginalism & have an objective concept of value you can then understand that labour is the source of profit & how capital accumulation itself can push down the rate of profit.
    On top of this you can then get to the notion of overproduction (of commodities relative to the commodity that acts as money) & see that debt fuels overproduction.
    This applies to EZ, US, UK etc.

  • rate this

    Comment number 131.

    It's not the currency it's the political ideology that supports the money supply in the hands of private banks that is the problem.Tonights programme isn't looking to promising if Schroeder,Schlesinger & Trichet are the highlights
    Banks should only lend out EXISTING money,any new money should be created DEBT FREE by the state & spent into the economy.Interest rates across EZ then become irrelevent

  • rate this

    Comment number 130.

    A Federal Europe would require a vote
    in favour by around 500m people in some
    25 nations with different languages, cultures
    and economies..
    In the present UNHAPPY mess, I do NOT believe
    that they would vote to give Brussels
    complete Federal power. The fiasco of the
    new FISCAL PACT which will be broken
    by some EZ members within a few months
    shows that Brussels really does not have a clue.

  • rate this

    Comment number 129.

    Now is the time to buy Gold, one thing for certain, it may fluctuate but it always has it's intrinsic value

    That's what significantly slowing down China is doing.

    Ah, and its also doing the usual in volatile times:

    buying even more US Treasury bonds.

  • rate this

    Comment number 128.

    The idea that political union will fix the problem is mainly based on the idea that citizens of richer countries will accept/not be able to refuse the money transfers necessary to support the weaker economies. This is a big assumption, will German (& other) citizens accept they are the same country as Greece or Italy when they find it means much of their wealth being transferrred?

  • rate this

    Comment number 127.

    Perhaps the real problem, is that the sheer size of populations, and complexity of modern life, means that the freemarket cannot provide the structure and necessities of life in any adequate or meaningful fashion. A move away from freemarkets is necessary for the wellbeing of the population of Europe.

  • rate this

    Comment number 126.

    Adam Smith & David Ricardo understood that the common denominator for all commodities was labour.
    It was labour time that stood behind price.
    Not the actual labour time for each commodity, but the average socially necessary labour time that can only be known in exchange, in the market.
    And on top of this you have the tendency to equalisation of profit rates across industries...

  • rate this

    Comment number 125.

    The Common Market was started as a protectionist system to protect those within the syatem by having import duties, this no longer applies. So what does the EU do? It costs money and provides nothing of value. We can continue to trade with each other without the costs. And without the EU we do not need the Euro.

  • rate this

    Comment number 124.

    121. "There is plenty of commentators these days on MSM talking about the incompatibity of fixed interest rates and disparate nations. Horse, bolted, stable doors...."

    I think you'll find there were plenty of commentators saying that in 1998. Only, back then, more people told them to shut up.


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