Confidence in the euro is at its lowest ebb. Is this the beginnning of the end for the common currency?
In the Eurovision Song Contest held last weekend, a cultural event as unique to Europe as Nascar stock-car racing is to the US, and about as pointless, France came second to last. The Netherlands did not even qualify.
That outcome was a bad omen for the votes in France and the Netherlands on the European Union constitution. Polls indicated both nations would reject the treaty (France has already). What they will really be doing though, is telling their leaders that the euro is not working. A well-recognised flaw in referendums is that participants rarely address the question printed on the ballot papers. Instead, they typically lapse into an opportunity to give the government of the day a pre-election spanking.
Referendums aside, the pile of fuel available to those who would burn the euro on a bonfire is growing. German business confidence was at its lowest in almost two years this month, according to the Munich-based Ifo institute. A survey of 4,100 Italian manufacturers by the Isae institute showed the most pessimism in three and a half years.
Euro members are not exhibiting the deficit restraint that the single currency was supposed to nurture. They are not even telling the truth about their economies.
Italy confessed earlier this week to 2003 and 2004 budget deficits of 3.2% of gross domestic product, rather than the 2.9% and 3% initially reported. The European Commission estimates this year's gap will reach 3.6%. Greece was chastised after it was caught last year understating its deficit plight since 1997. Portugal, meantime, sees a 2005 budget shortfall of as much as 6.8% of GDP. So much for the rules designed to cap deficits at 3% of GDP.
Some Czech Republic officials are starting to have second thoughts about joining the euro. Robert Holman, a member of the central bank's policy-making team, wants the government to delay plans for membership by the end of the decade because "it represents significant risks for us." On 22 May, the Czech Central Bank's deputy governor, Miroslav Singer, told Fiserova that "at the moment, the euro does not contribute to growth" in the countries using it. In the debt markets, recent price gyrations indicate growing concern among investors about lending money to nations where political and economic strife is on the increase.
In the 1990s, the best way to handicap the common currency's chances was to follow the money. The bond market in particular proved an accurate guide, as the yield gaps between different European nations dissolved in anticipation they would succeed in getting the euro up and running.
Now that the flow is reversing, maybe it is time to start thinking the unthinkable about the common currency project. To borrow from the Eurovision competition's most-famous winning song, by Swedish supergroup Abba, maybe the euro will soon meet its Waterloo.
By Mark Gilbert, Bloomberg columnist
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