Chirac, Kohl Almost Come to Blows Over the Euro in ‘Thriller’

By Simon Kennedy - published on 17/03/09 in Bloomberg News

As the euro celebrates passing the 10-year mark amid the worst recession since World War II, recall what monetary muckety-mucks predicted about its birth.

Alan Greenspan said he “didn’t think it was going to happen.” Milton Friedman questioned the single currency’s ability to withstand external shocks. Martin Feldstein warned that internal differences among the countries using the euro would generate serious conflicts.

A decade after its introduction in 1999, the euro has so far defied the naysayers, who underestimated the resolve of European leaders to overcome differences, devaluations and one Franco- German dustup bordering on a fistfight to achieve their dream of monetary union, writes David Marsh in his new book, “The Euro.” Similar fortitude will be needed if the currency is to keep proving its critics wrong, he says.

“The torturous chronicle of the euro contains exacting lessons that Europe must heed if it is to surmount rather than stumble over the obstacles that lie ahead,” writes Marsh, a former Financial Times reporter who now serves as chairman of U.K. finance company London & Oxford Capital Markets Plc. “The years to come will be a time of reckoning.”

The currency is now enduring its stiffest test yet, with some investors warning that countries such as Italy and Ireland increasingly risk defaulting on their sovereign debts and being forced out of the union. Yet Marsh brings us a timely reminder that the euro is as much a creature of politics as of economics; its future, he contends, will likely depend on politicians showing renewed vigor in the face of new trials.

‘No Panacea’

Mediterranean members, especially Italy, must face up to their debt burdens, he writes, while Germany must rethink its aversion to bailing out neighbors. All the euro nations must liberalize their financial markets and pursue deeper economic ties, he says. Since the euro’s birth, policy makers have avoided making tough choices and failed to take unpopular steps that would better meld their economies, Marsh writes.

“The single currency is plainly no panacea for economic ills,” Marsh says. “The danger is that some member governments have appeared to view it as one.”

Focused more on the past than on the present, “The Euro” is probably the best mainstream history to date of the political wrangling that created the currency against the odds. While not quite the thriller that George Soros describes in the cover blurb, the book offers a thorough, balanced and sometimes quick- paced review of Europe’s postwar economy and the efforts of policy makers, some of them former combatants, to unite 11 -- and now 16 -- countries from the Arctic Circle to the Mediterranean under one currency.

Fisticuffs in Dublin

Marsh did his homework, foraging through central-bank archives from Paris to Frankfurt and securing access to more than 100 key policy makers involved in founding the euro. His research yielded some telling anecdotes.

At one European summit in Dublin, German Chancellor Helmut Kohl and French President Jacques Chirac “almost came to fisticuffs,” Marsh says. Jean-Claude Trichet, for his part, once questioned the virtue of giving central bankers the independence that he now praises as president of the European Central Bank.

Marsh also digs up fresh details on how hard France and Germany fought to keep the euro on track after Soros broke the Bank of England’s defense of the pound in 1992, driving the currency out of Europe’s system of linked exchange rates.

Soros made more than $1 billion on that bet, and Britons remain deeply skeptical about the euro. They are unlikely to change their stance for years to come, Marsh says.

If “The Euro” has a downside, it’s that the 10 years of the currency’s actual existence are reduced to a couple of chapters. We’ll have to wait for a broad history of the ECB in action, a story still playing out as its officials squabble over how far to cut rates and whether to pursue unconventional monetary policies. The decisions they make in the months to come will help determine how successful the euro will ultimately be.

“The lesson of the first decade,” Marsh says, “is there is no certainty that the single currency will survive the next one unscathed.”