The eurozone should have learned from Coca-Cola’s mistake - if it aint broken, don’t fix it. And when it’s broken, get out of the fix, as quick as you can

The date 23 April 1985 was a momentous day in the life of the Coca-Cola corporation. For years, the company had been planning a new drink to see off the challenge from Pepsi. There was no expense spared for Project Kansas.

“New” Coke (as it was dubbed) bombed. The company responded with alacrity. It didn’t say consumers were wrong. It didn’t say that given time New Coke would be a success. It didn’t plough on simply because it had invested heavily in Project Kansas. Instead, it recognised that there was only one option: to go back to the traditional formula. This returned to the shelves on 11 July 1985, within three months of “New” Coke’s launch.

Now a deal has been done, what lies ahead for the Greek economy? Read more

There is a lesson here for both businesses and policymakers – and European policymakers in particular. Sixteen years after its launch, it should be clear even to its most die-hard supporters that the euro is New Coke.

European politicians took a formula that was working and messed around with it. They changed the ingredients that made the European Union a success, thinking it would be an improvement. Coca-Cola thought New Coke would see off the challenge from Pepsi. Europe thought the euro would see off the challenge from the US. Both were wrong. The only difference is that Coke quickly saw the writing on the wall, and that Europe still hasn’t.



It is not hard to see why the pre-euro European Union was popular. The EU was seen as a symbol of peace and prosperity after a period when the continent had been beset by mass unemployment, poverty, dictatorship and war. Growth rates were spectacularly high in the 1950s and 1960s, a period when Europe caught up rapidly with the US. Britain’s decision to join what was then the European Economic Community in 1973 was mainly due to the feeling that Germany, France and Italy had found the secret of economic success.

Other countries felt the same. They believed access to a bigger market would improve their economic prospects. In the last quarter of the 20th century, output per head in Greece, Portugal, Spain and – most spectacularly – Ireland, rose more rapidly than it did in core countries such as Germany and France. The gap in incomes per head did not entirely disappear but it certainly narrowed. As such, it was no surprise that countries in eastern Europe wanted to join the EU after the collapse of communism: Europe was associated with democracy and prosperity, a winning combination.

Since the birth of the euro, it has been a different story. The crisis in Greece has highlighted the problems that a one-size-fits-all interest rate can cause for countries on the periphery. In the good times, monetary policy is too loose for their needs, leading to asset bubbles, inflationary pressure and the loss of competitiveness.

In the bad times, there are no shock absorbers other than wage cuts and austerity. Devaluation of the currency is not possible and there is no system to tio transfer resources from rich to poor parts of the union. Without a common social security system, the result is higher unemployment, rising poverty and political disaffection.

What’s less remarked on is that the single currency has not been wonderful for ordinary workers in core Europe either. That’s not just true of Italy, a founder member, where living standards are no higher now than they were in the late 1990s, but also of Germany.

To be sure, German industry has prospered in the past decade and a half. Competitiveness has improved and this has made top-quality German manufactured goods more competitive on global markets. Exports have boomed, as has Germany’s trade surplus.

All this, as Dhaval Joshi of BCA research has noted, has been possible because the wages of German workers have been squeezed. Amazingly, over the entire history of the single currency, nominal wages in Germany – not adjusted for inflation – have increased by less than they have in Greece, despite the savage wage cuts in the latter since 2010.

Joshi notes that the structural reforms to the German economy in the early 2000s were carried out ostensibly to boost productivity, but that in reality it rose no more quickly than it has in France, where no such reforms have been undertaken. As a result, the profits German companies have been making abroad have been due to the pay cuts swallowed by workers at home. It is little wonder, Joshi says, that public opinion in Germany is hostile to the idea of writing off Greece’s debts.

This sort of problem would not have occurred in the days before the single currency. Germany could not have built up its huge trade surpluses under a less rigid exchange rate system, because the mark would have appreciated, making exports more expensive and imports less expensive. There was no need for the German taxpayer to write cheques to the Greek government; all they needed to do was exploit the weakening drachma and head for the Greek islands.

The unhappiness felt by the Germans matters. Those who, despite all the evidence to the contrary, cling to the belief that the single currency is a progressive project, say that they always knew that monetary union had design flaws, and that the only way to make it work was to buttress the single currency with a common fiscal policy, a European-wide system of tax and spending akin to that in the US or the UK.

This certainly would be one way out of the current mess, but the chances of Germany – or indeed any of the like-minded countries in northern Europe – signing up to such an arrangement is diminishing by the day. Nor would countries such as France or Italy submit to the conditions Germany would demand. European solidarity has been badly damaged by five years of continual crisis.

Another argument is that Europe is like a bicycle: it will fall over unless there is enough momentum to carry it forward. Companies don’t see it this way. If a product is failing, they change course before the business goes bust. That’s why Coca-Cola acted as it did in 1985.

It is not just companies that operate by trial and error. Margaret Thatcher was as big a zealot for the poll tax as Jacques Delors was, at around the same time, for the euro. There were riots on the streets of Britain and within a year of the poll tax being introduced in England and Wales in 1990, John Major announced its demise.

But that’s the way progress occurs. People have ideas and they try them out. The good ones succeed, often for seemingly mysterious reasons. Lessons are learned from the bad ones.

The euro was a bad idea. Getting rid of it and reverting to a more sensible way of running the European economy is not as easy as taking a product off the shelves. But the single currency is New Coke, and the sooner Europe realises that the better.