As a strategic political leader, former British Prime Minister Margaret Thatcher was often right – never more so than in her prediction 20 years ago that adoption of the euro would lead to a political and economic disaster.
Thatcher, of course, was not alone in foreseeing this calamity. Paul Krugman, the Nobel-prize winning economist, took the same view. In a recent column for The New York Times, he wrote: “I remember quipping, back when the Maastricht Treaty setting Europe on the path to the euro was signed, that they chose the wrong Dutch city for the ceremony. It should have taken place in Arnhem, the site of World War II’s infamous ‘bridge too far,’ where an overly ambitious Allied battle plan ended in disaster.”
Ideologically, Thatcher and Krugman are poles apart: She is a consistent conservative, while he is a doctrinaire liberal. But on the euro, they independently arrived at the same conclusion: The euro could not be sustained without the creation of a strong, central European government that can impose fiscal discipline upon the member states.
At the summit of European leaders in 1990 that approved the euro, Thatcher was the lone dissident. She insisted that Britain would retain her sovereignty and the pound sterling. Upon returning to Britain, she declared to the House of Commons: “What is being proposed now—economic and monetary union—is the back door to a federal Europe, which we totally and utterly reject.”
Thatcher paid a stiff price for this firm stance on principle. Geoffrey Howe, her deputy prime minister and a Europhile supporter of the euro, promptly quit the cabinet and helped provoke a backbench revolt among Conservative MPs that forced Thatcher to resign as prime minister.
Today, the euro is in a state of crisis brought on by years of profligate deficit spending by the Greek, Italian, Portuguese and Spanish governments. On April 27, Greek government bonds were finally reduced to junk status with the result that the socialist government of Greece could no longer borrow enough money to cover essential operational expenditures and interest payments on the national debt.
Speaking to the Commons in 1990, Thatcher foresaw that eventually, “there would have to be enormous transfers of money from one country to another” to sustain the euro. Again, she was right. To stave off default by Greece and to reassure bankers about the financial stability of Italy, Portugal and Spain, the European Union (EU) and the International Monetary Fund (IMF) have come up with a $900-billion plan to defend the Euro at the expense mainly of taxpayers in France, Germany and the United States.
Furthermore, as Thatcher and Krugman also predicted, the German and French governments are now calling for much tougher centralized controls to prevent any more members of the euro-zone from running up unsustainable budget deficits. Meanwhile, the Greek government is struggling with savage spending cuts imposed by the EU and IMF as a condition for bail-out assistance.
In February, Greece already had an unemployment rate of 12.1 per cent. That proportion is bound to go much higher as the government’s spending cutbacks take effect.
This, too, is as Thatcher predicted: “If we have a single currency, the differences come out substantially in unemployment or vast movements of people from one country to another,” she said. “Many people who talk about a single currency have never considered its full implications.”
Quite so. Now Krugman predicts that for Greece, not even a $900-billion bail-out will suffice. To revive economic growth and curb unemployment, the Greek government will soon be compelled to abandon the euro and re-establish its own hugely devalued national currency.
Will Italy, Portugal and Spain be next? That remains to be seen.
Meanwhile, given the international economic and financial turmoil brought on by the euro crisis, it’s evident that every major industrialized and trading country in the world is paying a huge price for the failure of EU leaders to heed the timely warnings by Thatcher, Krugman and others about the disastrous consequences of the euro.