The Euro: the Gamble with People's Prosperity that went terribly wrong.

Another erroneous and economically most disastrous policy inspired by the haughty political ambition to catch up with the US, was the much too early introduction of a common currency. In the US the introduction of the common US$ was the result of a long process of gradual economical integration.15 Being based on gold, the new common currency also enjoyed widespread international trust. Still even today the US is considered by many as too large and too differentiated for being an optimal currency area (UCA)16. Economists argue that the US would be much better off with a West and an East US$. In Europe the new currency was not goldbased, nor was the introduction of the Euro the result of a long integration process. It was introduced as a means to accelerate the integration; as a means to put pressure on participating nations to converge their economic policies. By reversing the natural order of events, politicians took the biggest gamble with prosperity of a whole continent ever. The regression confirms that this much too early introduction of the Euro has disastrous effects for Europe's growth. All other things equal, countries having stayed outside the EMU, have significantly higher growth estimated by the regression analysis at 2.57%. The deflationary effects of the stabilisation pact and the haughty Euro/Dollar exchange rate at which the Euro was launched can explain the massive negative growth effect only very partially. The main reason lies in the application of a common monetary policy to countries being insufficiently synchronized. The convergence resulting from the stabilization pact has indeed proved unsustainable. Due to the different exposure to externalities such as oil prices, interest rates, international business climate, the convergence has stopped and EU economies are gradually diverging again. The encompassing impact of the common currency has often been understated, if not disguised by the authorities. The introduction of a common currency does indeed imply more profound consequences than only a change of the colour and numbers on our pay-bills; Above all a common currency implies a common central bank and a common monetary policy. At the moment of the introduction of the Euro, Ireland grew at the fabulous pace of 11%, Italy at a rate of 1,7% only. Under these circumstances an exactly opposite monetary policy for both countries was appropriate. Still politics decided to launch the Euro anyway, implying a common monetary policy for all.

 Today the consequences of this political gamble disregarding economical reality are dramatic. 7 years only after the launch of common currency, European economies have seriously grown apart. In just 7 years a fast modernising country like Ireland gained 37% in competitivity relative to the OECD average, whilst Italy lost 19%. This adds up to an intramonetary union difference in competitivity gain of 57%. In a system with national currencies the Lira would have continued its long term tradition of depreciations and Italy would have maintained its competitiveness. With this option now excluded, and international labour mobility lacking Italy faces the risk of a deep depression if it stays inside the EMS. Italians seem indeed not easily inclined to leave their sunny peninsula for the sake of finding good jobs elsewhere. Ireland on the contrary till today has continued to boom, with inflationary pressures increasing. The most visible signs are house prices, blown up by much too low interest rates for a booming economy. But inflation is now also on the rise in consumer goods. Unable to set interest rates at an appropriate level for its fast growth, Ireland now risks run-away inflation, and a sudden and sad end to its uninterrupted quarter century success-story of fabulous growth.