Southern Europe was never meant to join the euro

By Charlemagne

I HAVE spent the last two days in Lisbon, talking to politicians, bankers, senior officials and economists about how the euro zone crisis looks from Portugal's ocean-side vantage point, at the far southwestern corner of the European Union.

It was good to take a break from the slightly febrile state of the debate in Brussels, where every utterance from Germany, France or the European Central Bank is jumped on and analysed for clues that either (a) Europe is doomed as never before, or (b) Europe is about to take a great leap forward. In Lisbon, it was oddly soothing to find that the kerfuffle over possible bail-outs for Greece and euro zone solidarity is treated with rather more phlegm in the land of fado and other forms of elaborately socialised gloom.

In the eyes of lots of northern countries, southern European nations like Portugal were never meant to qualify for the single currency, said one prominent former minister, who was in government when Portugal passed the five Maastricht criteria for entry (to do with debt and deficit levels, exchange rates, interest rates and inflation). There were always two theories surrounding the euro zone, he suggested. One was that enlarging it gave Europe scale, and allowed it to challenge the dollar as a reserve currency. The other school of thought was always intensely sceptical about euro zone enlargement, and always thought there would need to be "ethnic cleansing" one day, as weaker members were asked to leave.

This politician remembered the distinctly frosty welcome he received from a Dutch colleague, when Portugal qualified to join the single currency. "Well, now you've qualified for the euro, you won't need cohesion funds [EU aid for poorer members] any more," the Dutch minister told him.

The Portuguese did not do their homework to prepare for euro entry, this politician conceded. Overnight, the country found itself enjoying German-style low interest rates, and not enough effort was made to explain to citizens that this was a unique moment in history, to be seized and not squandered. Instead, Portugal embarked on a short-termist spiral of private indebtedness, though it avoided the housing bubbles seen in places like Spain or Ireland.

But an economic analysis of Portuguese membership of the European Union only gets you so far. Time and again, I was told that for the Portuguese, EU entry in 1986 was a political decision, taken despite real fears about the economic consequences of membership. It was the same when the EU began negotiating eastern enlargement to take in former communist countries. The arrival of Slovakia, the Czech Republic, Poland and the others was a hammer blow for the Portuguese strategy of attracting manufacturing plants and foreign investment from rich multinational firms like car-makers: many firms that had moved to Portugal in search of lower-cost production inside the EU simply upped and headed east after 2004, when the big bang enlargement took place. Lots of people knew that eastern enlargement might be tough on Portugal, but such concerns were trumped by a bigger political argument, I was told by several interviewees. In simple terms, Portuguese voters felt that EU membership had consolidated their young democracy, and believed it was only just for ex-communist countries to enjoy the same chance.

I was also in Lisbon to speak in a debate, during which I made the generic observation that for many smaller, less economically developed members of the EU, entry had been buttressed by an economic bargain: open your markets, in exchange for redistribution (in the form of EU funds from richer members) allowing for economic convergence. That bargain only functioned while the EU enjoyed economic growth, I suggested, which meant that the next few years might well prove rather perilous, as there are good reasons to fear many EU members will see only feeble growth for some years to come.

A distinguished participant came up to me afterwards, to express the hope that I had not been suggesting that joining the EU was an economic decision for Portugal. I had been making a general point, I said. He then told me of a telling piece of political stagecraft played out by Mário Soares, who as prime minister negotiated Portugal's entry to the union. Only a few years after the Carnation Revolution that ended dictatorship and brought democracy to Portugal, Mr Soares summoned two dozen or so of the country's most respected economic experts, to advise him on whether it would be in Portugal's interests to apply to join the then European Economic Community. One by one, the invited sages told him Portugal was too weak an economy to stand the shock of opening its markets to countries like France or Germany. Portugal should seek some form of special associate membership, Mr Soares was told. Full membership would be simply too dangerous.

As the meeting drew to a close, Mr Soares looked at his watch. "Gentlemen," he announced. "At this very moment a letter applying for EEC membership is being handed over in Brussels." There was uproar. Why had the prime minister invited people to debate the economic merits of this decision, if he had already made up his mind, Mr Soares was asked, angrily. Because I wanted everyone to understand that this was not an economic decision, he replied. We are joining Europe to make sure this country will never be a dictatorship again, of the right or the left.