One of the odd things about the years leading up to the creation of the euro in 1999 was the fact that, outside the UK and Scandinavia, so few Europeans in a position of authority found fault with the thing.
Antonio Fazio of Banca d’Italia was an exception to the rule – the only central bank governor in Europe to go public with his objections – according to David Marsh, author of The Euro, a history of the single currency.
Time and again, Fazio argued currency unification would make it impossible for Italy to keep its goods competitive via its time-honoured practice of lira devaluation.
The failure of Europe’s politicians and central bankers to debate the eurozone plan properly is one of the notorious examples of “groupthink” of recent times. The French pushed for the common currency to tether Germany to the European cause and stop runs on the franc. Germany wanted goodwill for German unification and to stop seeing their goods undercut in price by countries, like Italy, with depreciating currencies. Rival sets of politicians chose to see the euro as a solution to their problems. But everyone’s problems were different. The odds were against euro from the start, but the participants failed to see why.
This is because groups of people seeking harmony cease to carry out a realistic appraisal of available alternatives to their preferred course of action, found research by Yale University.
The approach keeps society together, but undermines the creativity and intelligence displayed by individuals as they submit themselves to the general will. They put their feelings to one side, so they can deal with the facts on the ground.
Groupthink helped the Japanese achieve success with their attack on Pearl Harbour in 1941, because US generals unanimously agreed the Japanese would not be stupid enough to carry it out.
In his own research into creativity, Brian Uzzi of the Kellogg School of Management studied the success, or otherwise, of Broadway musicals. He found that those that flopped were led by frequent collaborators who lacked the ability to think out of the box.
It did not take long for arch-European Romano Prodi, the then Italian prime minister, to neutralise Antonio Fazio, to ensure he did not cause any trouble. Fazio could not fight the political momentum, but warned in 1998 that the Italians would have to become more competitive: “Otherwise the circle will turn vicious.”
In its early years, the euro was popular with traders as an alternative currency to the dollar. Global liquidity enabled weaker economies such as Greece, Spain and Italy to borrow at spreads that were no greater than 0.1%.
Fast-forward to the present day and Fazio’s forecasts have proven correct. Countries that borrowed, rather than coming to terms with restructuring, are in trouble. They are getting German help, but they have been forced to agree austerity packages by way of return. They have been suffering interest rates of 6% to 7%, as opposed to the zero interest rates at which Germany can borrow.
Consensus between pro-euro politicians is being blown apart by a new generation of politicians who see nationalism as a route to power. They would include such individuals as Alexis Tsipras of the Greek Syriza party; Marine Le Pen of the French National Front and Geert Wilders of the Dutch Freedom Party. Tsipras could lead Greece to default within months. It will only take another year or two of austerity for dither and despair to produce turmoil elsewhere.