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The real price of the cheap euro

by Ignacio Ramonet 

Too weak or too strong? By mid-September the euro was down by more than 27% against the dollar and the debate about its strength had torn the tiny group of “experts” on the European currency wide open. The media express horror that it is so “dangerously undervalued” and European Central Bank (ECB) president Wim Duisenberg voices his “deep concern” everywhere.


Now, the prophets of doom are taking up their chorus again - this time because the euro is “too weak”. They are shouting down people like Nobel prize-winning economist Robert Mundell, who has described this “competitive devaluation” as a “blessing in disguise”. Or German Chancellor Gerhard Schröder for being bold enough to recognise that the euro’s weakness was encouraging exports and stimulating German growth. Or Italian government leader Giuliano Amato for admitting that Italian firms were delighted about the weak euro.


So what is the “correct” balance for the euro against the dollar? According to Professor Jean-Paul Fitoussi, that is the wrong question. “Economic theory, largely confirmed by the facts, teaches that exchange rates are rarely in balance; their normal way of adjusting is to overreact. In other words, they are ’normally’ either too high or too low” (7). The commotion about exchange rates is all the more irrational because nearly 90% of the European countries’ trade is conducted in the single currency. The EU is a self-contained economy and the euro remains stable within the euro zone. Only 10%, in value terms, of the goods consumed in Europe are produced outside the EU and still subject to exchange fluctuations.


The truth is that, under the strong hand of the market ideologists, the euro, strong or weak, has enabled structural adjustment to be imposed on the EU. Ultimately, this will mean the end of a certain concept of the welfare state, “reform” of the labour market, changes to social security, lower taxes for the well-off and a smaller public sector.

Indifferent to the presence of 65m economic outcasts within the EU, Christian Noyer, vice-president of the ECB, gives the game away when he says that if the euro were weak in the long term, companies might slow down their drive to increase productivity and governments might put the brake on their structural reforms (9). What structural reforms? Theo Waigel, the former German finance minister, spells it out: “To inspire confidence in the external value of the euro,” he says, there must be “radical fiscal reform, far-reaching reform of the welfare state and a flexible employment policy” (10). In short, the market is what counts and never mind the people.

Ignacio Ramonet

Translated by Malcolm Greenwood
  1.  Financial Times, 7 December 1998.
  2. L’Express, 21 November 1996.
  3. Le Monde, 7 February 1997.
  4. Ibid, 29 April 1997.
  5. Ibid, 12 December 1998. 
  6. Business Week, 18 September 2000.
  7. Le Monde, 5 May 2000. 
  8. International Herald Tribune, 14 September 2000. 
  9. Les Echos, 18 September 2000. 
  10. La Tribune, 8 September 2000.

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