Sunday, November 23, 2014

Is the Euro Ending or Beginning?

BRUSSELS – When the architects of the euro started drawing up plans for its creation in the late 1980’s, economists warned them that a viable monetary union required more than an independent central bank and a framework for budgetary discipline. Study after study emphasized asymmetries within the future common-currency area, the possible inadequacy of a one-size-fits-all monetary policy, the weakness of adjustment channels in the absence of cross-border labor mobility, and the need for some sort of fiscal union involving insurance-type mechanisms to assist countries in trouble.

Beyond economics, many observers noted that European Union citizens would accept tight monetary bonds only if they were participating in a shared political community. The former president of the Bundesbank, Hans Tietmeyer, liked to quote a medieval French philosopher, Nicolas Oresme, who wrote that money does not belong to the prince, but to the community. The question was, which political community would support the euro?

Some of these warnings were inspired by deep-seated doubts about European monetary unification. But others merely wanted to emphasize that Europeans needed a better-equipped and stronger vessel for the journey that they were contemplating. Their message was simple: national governments must make their economies fit for the strictures of monetary union; the euro must be supported by deeper economic integration; and a common currency needs political legitimacy – that is, a polity.

In the end, the leaders at that time – especially German Chancellor Helmut Kohl and French President François Mitterrand and his successor, Jacques Chirac – set forth to sea in a light vessel. On the economic front, they agreed on only a bare-bones Economic and Monetary Union built around monetary rectitude and an unenforceable promise of fiscal discipline. On the political front, they did not agree at all, so the creation of a European polity remained stillborn.

Some at the time, like then-European Commission President Jacques Delors, openly deplored this narrow approach. Though political constraints prevailed, the euro’s architects were however not naive. They knew that their brainchild was incomplete. But they assumed that, over time, monetary unification would create momentum for national reforms, further economic integration, and some form of political unification. After all, that piecemeal approach is what had helped to build the EU ever since its origins in the coal and steel community of the 1950’s. Few among the euro’s proponents expected that there would be no significant change after its launch.

But this assumption was mistaken. From the signing of the Maastricht Treaty in 1992 to the tenth anniversary of the euro in 2009, the expected momentum for creating a common European polity was nowhere in sight.

Indeed, very few countries have bothered to spell out, let alone implement, a euro-inspired economic-reform agenda. Having agreed to delegate responsibility for monetary policy to the European Central Bank, most governments put up fierce resistance to any further transfer of sovereignty. In 2005, a timid attempt to foster political integration by adopting a constitutional treaty was defeated in popular referenda in France and the Netherlands.

So, contrary to expectations, things stayed put. Soon after the introduction of the euro in 1999, it became clear that the scenario favored by the common currency’s architects would not be realized. Everybody accepted – if grudgingly – that the bare-bones EMU was the only game in town.

Now, however, what did not happen through smooth evolution has started to happen through crisis. Since 2009, the Europeans have already put in place the crisis-management and resolution apparatus that they initially refused even to discuss. Simultaneously, governments, under merciless pressure from the bond markets, are introducing labor- and product-market reforms that they deemed politically inconceivable only a few quarters ago.

But the bond markets want more. The questions that they are asking more loudly with each passing day demand answers. Will Europeans agree to mutualize part of the cost of the crisis? Greece’s creditors (mostly eurozone residents) have already accepted some of the burden by accepting a “haircut” on their assets. But, if another country finds itself unable to bear the fiscal cost of the crisis, will it also shift the burden to its external creditors in some form or another?

And, beyond transfers, will Europeans, or some of them, agree to create a banking union (that is, Europeanization of banking supervision, deposit insurance, and crisis resolution)? Will they agree to pool tax revenues so that EU-level institutions can credibly take charge of financial stability?

These questions are vital for the future of the common European currency. In spite of their desire not to raise them, European leaders face the uncomfortable prospect of having to answer them – and without much delay.

The historical irony is that an environment of crisis is forcing Europeans to make choices that they did not want to envisage, much less confront, in quieter times. The Greek debt crisis forced them to create an assistance mechanism. The Spanish crisis may well force them to create a banking union. And the threat of a Greek exit from the euro may force them to decide how far-reaching a fiscal union they are prepared to embrace.

For many, recent developments mark the beginning of the end for the euro architects’ bold creation. But, depending on how Europeans answer these questions, today’s crises might one day be remembered as the end of the beginning.

Read more from our "The Euro at Bay" Focal Point.

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    1. CommentedProcyon Mukherjee

      The doubt never waned on the other side of the Atlantic that Euro could die a pre-mature death, articles were galore on this topic right from the beginning. I particularly remember one in the National Geographic in the late eighties (rather capricious to have euro dedicated to the natural calamities), where Euro was favored to close at far less than the dollar in valuation; it just happened the other way.

      In the treatise 'This time is different', there are many examples devoted to the challenging times that european economies had gone through (including failures of economies as large as Spain, Italy, Austria when they were not even united monetarily), but times could be reversed. There is no doubt that Europe will prove the skeptics wrong this time again; after all monetary union has its advantages and the polity will always take the right course that is best amongst the available options.

      Procyon Mukherjee

    2. CommentedZsolt Hermann

      Thank you for the excellent review article.
      Indeed the initial plan backfired, and I cannot really understand the thought behind it except if we apply the usual American expression, "Kicking the can", hoping that things will somehow turn into happy ending, but nobody wanted to deal with the politically sensitive issue of further integration at the beginning.
      But we cannot build a house in a way that we built the top of the house without walls and foundation, thus it is not surprising that the top, a superficial financial union is falling apart.
      Unfortunately so far in human history we always made the next step, the next stage of our evolution when the present state has become intolerable, that we had no choice of staying put but we had to move on through blows and suffering.
      Today we are approaching a similar state not only in Europe but all over the world. It is clear that our present civilization, the whole socio-economic system based on an illusion of constant growth, and excessive overproduction, beyond our means and necessities is unsustainable and now entered a self destructing phase.
      We can also see that immediately as the chaotic state appears far right and far left forces started to emerge on populist, nationalistic promises.
      We still have a choice before we enter an inevitable volatile, unpredictable state but for that we have to make the difficult choice the "European forefathers" failed to make, to initiate and achieve the required full integration that would adjust us to the global, integral and interdependent conditions we evolved into.
      And in order to do that without backlash, demonstrations, riots and even more far left and far right, present leaders and public opinion formers have to start a global, integral education program through mass media, explaining the nature and laws of this global integral human system to each and every human being in an open, transparent and scientific manner, so they could make an informed, free and open decision about joining the new fully integrated, supra-national system after understanding that it is in their bast interest to support the interconnected network in order to achieve individual prosperity and future.
      We had enough experiments with forced, tricked social, and economical systems, it is time we create something mutually, willingly out of free choice not only by a small minority, but all of us together.

    3. CommentedHamid Rizvi

      Even, if by some unfathomable means Greece is able or better enabled to pull itself out of the fine mess it finds itself in there are others waiting in the wings to be bailed out.

      You have a team in which each member has its own play book, devices it's own plays and strategy with a common goal of winning and remaining a team.

      Dis-similar, systems brought togather as a matter of convenience. In haste people forgot to ask what if and everyone went along the merry way.

      It's a system built to fail. How ironic!

    4. CommentedWilliam Wallace

      Granted the crisis is forcing European leaders to get serious about the EU and the implications on policy of a common currency. Yet this is against a rising tide of public opinion that now questions the euro altogether.

      Europe may never see a charismatic leader capable of inspiring with a compelling vision of the benefits of gradual political union, and the perceived "democracy deficit" grows. Brussels and the EU are increasingly targeted as the cause of all ills, much as the Republican Party's attacks on the federal government have eroded faith in US institutions.

      At the very least - and this is hoping for much - the steady drumbeat of us vs them, North vs South name-calling needs to be calmed. Playing to national stereotypes and identifying economic problems as the result of the moral failure of others, as is often the case today, is steadily eroding the ability of Europeans to envision a rationale for union.