The evils of a strong currency

Herman Van Rompuy, president of the European Union, blamed in an interview with the Financial Times the strength of the euro in recent years for blinding the eurozone to its underlying fiscal problems.

“What went wrong wasn’t what happened this year. What went wrong was what happened in the first 11 years of the euro’s history. In some ways we were victims of our success.
“The euro became a strong currency with very small interest rate spreads [on government bonds]. It was like some kind of sleeping pill, some kind of drug. We weren’t aware of the underlying problems.”

Mr Van Rompuy said that the 16-nation bloc had been on the edge of a breakdown last month that could have caused a world crisis. But European leaders now understood that the way forward was to implement politically unpopular but necessary economic reforms, such as opening up labour markets and raising the retirement age.

Mr Van Rompuy acknowledged that the markets had played a useful role since the Greek debt crisis erupted last October in identifying weaknesses in eurozone economic governance. But he fully supported tougher financial market regulation, especially for credit rating agencies and derivatives markets – measures EU authorities are drawing up.

“Most of us are not happy with excessive market developments. But when you look at this in a broader perspective, the markets are sanctioning bad policies, sometimes excessively, disproportionately and based on rumours and prejudices.”

Mr Van Rompuy said financial markets had contributed to the eurozone’s crisis by being too soft on fiscally irresponsible governments in the years after the euro’s creation in 1999. He criticised the French and German governments of the early part of the decade for relaxing the stability and growth pact – the EU’s fiscal rulebook – in 2005. “This sent the wrong signal,” he said.

Europe’s biggest challenge was to introduce reforms required to double the EU’s economic growth rate and safeguard its unique blend of vigorous capitalism and a generous welfare state. “The toughest thing now is reforms in the budgetary field and the economy – competitiveness, labour market reforms, the retirement age,” he said.

“Of course, it will be difficult. At certain times there will be social unrest and political opposition to all this. But I know most of the leaders now. They are preparing to take huge risks because they know what is at stake for the eurozone.”