Since the eurozone economy came into being on 1st January 1999, its overall record has been poor. Its growth rate, averaging 2.3% over the five years since its inception, has been lower than the 2.6% achieved by the USA, 2.4% in Britain and the combined 2.6% of all the EU economies outside the euro. During the first three years after the Single Currency was established, growth in the eurozone was relatively good at 2.5% in 1999, 3.4% in 2000 and 3.9% in 2001. Since then, however, as the inability of its institutions to deal with the strains of changing world economic events has become apparent, its performance has deteriorated significantly. Growth in 2002 was 0.8% and only 1.0% in 2003. The unemployment record is even worse. In the eurozone economies recorded unemployment now averages 8.8% and it is still on a rising trend. Germany alone has 4.5m people officially out of work. Nor do these figures tell the full story. Numerous studies have shown that the real rate of unemployment is about 50% higher than the registered rate due to large numbers of people either giving up hope of ever finding a job again or getting into benefit traps which make it uneconomical for them to work. As a result of the poor economic prospects which the eurozone exhibits, investment has fallen - a very poor sign for the future - while living standards have stagnated. To add to the misery, inflation in most euro countries has remained stubbornly above the European Central Bank (ECB) target level of 2% while the euro has shown itself to be one of the most unstable currencies in the world in terms of its external value. Is this what we were promised by its proponents when the euro was introduced? Of course, it wasn't. Nevertheless, most of the travails from which the eurozone suffers were foreseen at the time by sceptics who have turned out to have been far better than the euro-authorities at predicting what the impact would be of foisting monetary union on a group of countries which were in no sense an optimal single currency area.
Why has the record, especially recently, been so poor? Part but by no means all of the problem lies with the institutional arrangements within which the eurozone operates. Two key features have hobbled its performance. The Stability and Growth Pact, insisted upon by the Germans as a result of their fear of irresponsible financial behaviour by the Italians and others, has acted as a heavy brake on fiscal expansion. When any economy goes into a downturn, it makes sense for the government to spend more than it receives in tax income for a period to stimulate economic activity. The Stability and Growth Pact limits counter-cyclical borrowing to 3% of national income, which is far too little as both Germany and France have recently discovered. Both these countries then refused to stick to the rules, gravely upsetting everyone else and undermining the credibility of the euro, meanwhile the severe deflationary pressure on growth still remains. The other major institutional drag on the euro-economy is the European Central Bank, which is charged with keeping inflation at no more than 2%, with no remit to achieve any other economic targets, such as a reasonable growth rate or low unemployment. Run by bankers selected for eight year non-renewable terms, and subject to virtually no democratic pressures, the ECB has consistently pursued far too restrictive a monetary policy, putting a further heavy dampener on the growth of demand within the eurozone.
Unfortunately, not. These institutions merely worsen the problems with a structure which is flawed in more deep-seated ways. The fundamental reason why the eurozone is never likely to work successfully is that it is not an optimal area for a single currency. Its Member States are not sufficiently like each other, either structurally or cyclically, for them all to react in a similar way to changing economic conditions. The disparities in living standards are too wide for them to perform as a homogenous whole. Despite all the efforts of those favouring euro integration, there is no eurozone wide "demos" providing the willingness to pay for socially cohesive policies on the major scale seen within all developed countries. As a result, there are no effective mechanisms for transferring sufficient resources from areas of the eurozone which are doing relatively well to those which are doing poorly. Instead, the major EU-wide funding mechanism, the Common Agricultural Policy, comprising 43% of the entire EU budget, subsidises countries such as Denmark and France, which are among the richest. The reality is that the Single Currency never made any sense from an economic point of view. It was introduced entirely for political reasons. History, however, shows few examples of policies which are wrong economically leading to satisfactory political outcomes.
Faced with the manifest failure of the eurozone economies to perform as well as they hoped, particularly over the last two years, what is the EU political elite proposing to do to remedy matters? Sadly, nothing which is likely to make much positive difference. With weary familiarity, there have been calls, such as those in the Lisbon Declaration, for a much more flexible euro-economy, with all too familiar exhortations for more privatisation, worsening labour conditions and more job insecurity. As we found out in Britain during the Thatcherite era, however, these are socially extremely expensive ways of improving economic performance, even if they work at all. The reason that they are so ineffective is that they ignore the real problems in the eurozone - as in Britain in the 1980s - which have never really been on the supply side. On the contrary, the fundamental failure has been to provide adequate demand, to keep everyone working and the economy growing. The big problem, however, is that creating the economic conditions which produce favourable results of this sort is largely incompatible with the policies which need to be implemented to hold the eurozone together. It is a salutary fact that there is no example anywhere of a currency union remaining in existence for more than a limited period unless the area it covered became a political unity. If the EU fails to become a fully fledged unitary state, therefore, the chances of the eurozone continuing permanently in existence must be in doubt.
Unfortunately, the poor performance of the eurozone has not only depressed living standards and economic prospects within the Single Currency countries; it has also spread into the international arena. In particular, low growth and high unemployment within the eurozone have made it far more difficult for the EU to play a constructive role in the world economy. The Doha trade round hangs in the balance mostly because of EU intransigence on agricultural protectionism - an inexcusable example of selfishness on the grand scale from which we would be far better to dissociate ourselves completely if only we were able to do so. It is not just in agriculture, however, that EU trade policies are a disgrace. They are just as damaging when protecting vested interests within the EU, thus enabling them to avoid competition from the output of newly industrialising economies on textiles, shoes, steel and other products for which developing countries have a comparative cost advantage.
In May 2004, another ten countries are due to join the European Union. After relatively short transitional periods, all are going to have not only to join the euro but also to take on board all the other huge commitments involved in the accumulated acquis communautaire. All these countries are substantially poorer than the EU average. Most have large agricultural sectors, with Poland alone having almost as many farmers as the whole of the rest of the existing EU put together. Nearly all have demographic and pension problems - with rapidly aging populations combined with very low birth rates - which are even worse than those in the rest of the EU. The vital requirement for the applicant countries is that they should all have the capacity to trade their way to full employment and prosperity, so that they can stand on their own feet. To do this, however, they need exactly the fiscal. monetary and exchange rate flexibility which the eurozone will deny them. The danger, then, is that their economies - like the former Eastern Germany - will become uncompetitive and in desperate need of subsidies on a scale which the EU will be increasingly unwilling to make available.
There were many people who in 1999 thought that there might be economic advantages to Britain joining the Single Currency but who believed that the constitutional consequences were unacceptable. Much of the hardening of opinion in Britain against euro membership has come about because of a widening recognition that not only is the euro bad politics; it is also bad economics. An ever higher proportion of the public now see that not only would joining the euro sweep away our ability to run our own economic affairs the way we want, but it would also lead to lower growth rates, higher unemployment, less investment and diminishing prospects for rising living standards. Furthermore, if the enthusiasm for "flexibility" now manifest in the eurozone becomes accepted, public opinion increasingly recognises that it will lead to just the sort of polarisation in income, wealth and life chances, which is regrettably the consequence every time policies of this kind are put into operation. From post office closures to denationalising the railways, people can see that too much liberalisation leads not to a better balance between social and economic objectives but to one with which they feel significantly less comfortable, if not actively cheated. It was undoubtedly sentiments along these lines, as much as anything else, which persuaded the Swedes to vote "no" to the euro last September. The prospects for Britain joining the euro in the foreseeable future thus continue to diminish as a more and more solid majority of the British people realise that for both economic, political and democratic reasons we are better off out. It is an argument which eurosceptics have well and truly won.