Nobody likes getting dumped on an anniversary. January marks the ten-year anniversary of the euro, whose introduction was supposed to herald an era of not just economic prosperity, but closer integration across the continent. But as the financial crisis grips Europe, enthusiasm for the euro is waning quickly among the public in many member states, and nations that had once pledged to adopt the currency are getting cold feet.
In Malta, the euro replaced the lira as official currency in 2008 amid celebrations marked by fireworks, a symphony orchestra performance, and a gala flush with high-profile guests. Prime Minister Lawrence Gonzi heralded the change as a triumph, saying, “We are proud that Malta is now part of the eurozone. We are looking forward to welcoming local and foreign investors and tourists from Europe and beyond.” But four years later, disillusionment with the euro is widespread. “On the whole, it has not been good,” lamented Charles Demech, a longtime hotel operator in Valletta, Malta’s capital. “After the euro came, prices went up but salaries did not. Everything became more expensive for the average Maltese.”
Others share the sentiment that the case for adopting the euro has too often been assumed rather than actively demonstrated. Maltese MP Alfred Sant said that under eurozone rules, Malta “had adopted a system of policy-taker, as it had to adhere to policies taken by the most influential countries in the EU–it was evident that Germany and France set the direction. Meanwhile, little was mentioned with regard to the Maltese interests.” In late December, the Maltese government pledged to contribute €260m to an IMF package that will be used to bail out some of Malta’s larger, debt-laden neighbors. Oliver Briffa, a taxi driver from Msida, a suburb outside the Maltese capital, expressed deep frustration with the arrangement. “Big countries need to help us, not have us help them. Everything was better under the lira.”
Lino Briguglio, director of the Islands and Small States Institute at the University of Malta, is more optimistic about the currency’s future. “The eurozone will continue to exist, mainly because Germany and France have too much to lose if it doesn’t,” he assessed. However, Briguglio concedes that Maltese public opinion has shifted against the euro, saying “I think we are in a trough at present, but when the situation improves, there will be a recovery in the euro economies and in the attitudes towards the euro.” Briffa is not so certain: “The government keeps saying things will get better. We wish to know how.”
Gaps have begun to open elsewhere between eurozone governments, most of which state their commitment to preserving the single currency, and the public. Debtor nations like Greece and Spain have witnessed grave social unrest and protests against austerity measures imposed from outside, while citizens in stronger economies like Germany and the Netherlands bristle at the thought of their tax dollars going to bail out neighbors they view as profligate and irresponsible.
Meanwhile, other European states that have undergone a long courtship to join the eurozone have begun to express reservations. “The euro has lost some of its attractiveness and Poland is in no rush to enter the eurozone,” said Merk Belka, the governor of the National Bank of Poland. The Czech Prime Minister, Petr Necas, recently disparaged the eurozone as a “debt union” and has pointedly refused to set a target date for his nation to join the common currency.
The possibility of a eurozone breakup, once deemed unthinkable, suddenly seems far less remote. A Bloomberg poll of international investors conducted in late 2011 found that nearly half of respondents thought one or more countries would exit the currency union by the end of 2012; nearly a third more expected a member state to withdraw by the end of 2016. Around the same time, analysts at Nomura, a Japanese banking conglomerate, wrote “The euro zone financial crisis has entered a far more dangerous phase…a euro breakup now appears probable rather than possible.”
Many predict dire consequences should the eurozone disintegrate. Christine Lagarde, managing director of the IMF, has warned of a global depression. A UBS analysis predicts, “Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. We estimate that a weak Euro country leaving the Euro would incur a cost of…40% to 50% of GDP in the first year. It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.”
So what might the end of the euro zone look like? An apocalyptic nightmare, according to one camp, where the ghosts of Jean Monnet roam the streets like zombies and Europeans would do well to stock up on canned goods and precious metals. Faced with such a disastrous scenario, why then might a nation consider withdrawing? One or more member states may seek to leave the eurozone in order to regain control over monetary policy, devalue its currency, and improve export competitiveness, say advocates of a withdrawal. A country such as Greece, already suffering from high unemployment, inability to raise money through the bond market, and forced austerity could–spurred on public pressure–come to believe that it is better off by opting out.
Predictions of bank runs, sovereign default, and increased social tension serve as little deterrent to a nation already vulnerable to such painful economic conditions. Some believe that an orderly breakup is precisely what Europe needs to emerge from the crisis. The Centre for Economic and Business Research, a British think tank and consultancy, contends that “If it [the eurozone] breaks up the immediate pain is much more intense, but then there is a more stable basis and we would expect that within about 30 months growth will actually be faster than if the eurozone survives in its current form.”
Martin Feldstein, former chairman of the Council of Economic Advisers and currently a professor economics at Harvard University, predicts that Greece and Portugal will eventually default on their sovereign debt–something that he believes is very much in their national interest. “In an economy with a floating exchange rate, with an ability to adjust their exchange rate or to allow it to respond to the market, the Greek exchange rate would gradually fall over time and that would make their goods more competitive. But with a fixed euro exchange rate there’s nothing that can be done along those lines…We have seen defaults around the world in many countries and it helps them to clear their books.”
If the eurozone were to split apart, what would become of small member states such as Malta? Says Demech, the hotel operator, “I don’t know if we can survive on our own.”