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National Bank Governor in Financial Times: Euro a ‘Strategic Error’

Péter Cseresnyés 2019.11.04.

European Union member states, both in and outside the euro zone, should admit that the euro has been a “strategic error,” furthermore the time has come for Europe to “seek a way out of the euro trap,” the Governor of the National Bank of Hungary (NBH) said in an opinion piece published in the Financial Times on Sunday.

“There is a harmful dogma that the euro was the ‘normal’ next step towards unifying Western Europe. But the common European currency was not normal at all, because almost none of the preconditions were met,” NBH Governor György Matolcsy said in the article.

According to Matolcsy, the necessary pillars for a successful global currency, even two decades after the euro’s launch, are still missing: a common state, a budget covering at least 15-20 percent of the euro zone’s total gross domestic product, a euro zone finance minister, and a ministry to go with the post.

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The introduction of the euro was a “French snare,” he stated. At the time of the German reunification, according to Matolcsy, the then French President, Francois Mitterrand was trying to prevent German dominance after its unification and managed to convince the Germans to ditch the Deutschmark in favor of the euro. Germany’s Chancellor Helmut Kohl agreed because he thought that the introduction of the currency would be the price for German unity, the head of the central bank explained.

“They were both wrong. We now have a European Germany, not a German Europe, and the euro was unable to prevent the emergence of another strong German power,” he emphasized. “But the Germans also fell into the trap of the ‘too good to be true’ euro.

They missed the digital revolution, miscalculated the emergence of China, and failed to build pan-European global companies.”

Talking about the expansion of the Euro area, he said: “The inclusion of southern European economies in the eurozone led to an exchange rate that was weak enough to allow the Germans to become the strongest global export machine in the EU.”

But Germans had become “complacent” and “they neglected to upgrade their infrastructure or to invest enough in future industries,” the NBH Governor argued.

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Matolcsy said the primary reason for the euro is the need to strengthen the bond between European powers and defend the bloc against the Soviet Union, which had disappeared with the collapse of the USSR.

According to the head of the central bank, “Most eurozone countries fared better before the euro” than in the past twenty years, so “The time has come to wake up from this harmful and fruitless dream.”

A good starting point would be to recognize that the single currency is a trap for practically all its members – for different reasons – not a gold mine.”

It was time, he said, for EU states both in and outside the eurozone to admit that the euro had been a “strategic error.”

Matolcsy concluded: “We need to work out how to free ourselves from this trap. Europeans must give up their risky fantasies of creating a power that rivals the US. Members of the eurozone should be allowed to leave the currency zone in the coming decades, and those remaining should build a more sustainable global currency.”

The political debate on the introduction of the euro in Hungary continues. Although the country could meet the required conditions in the coming years with ease, policymakers seem hesitant to make the decision. And Matolcsy’s highly critical words could indicate that the government has no intention of launching the currency not only in the near future but at all.

Featured photo by Zsolt Czeglédi/MTI