Sunday, November 23, 2014

Europe’s Procrustean Nightmare

MANNHEIM – The European Union’s policy of saving the euro at all costs is enough to guarantee the euro’s survival. But is preserving the “one-size-fits-all” euro really worth sacrificing the eurozone’s competitiveness and, ultimately, European solidarity?

It was the single market’s establishment in 1992 – not the euro’s introduction seven years later – that brought free trade, increased competitiveness, and new wealth to Europe. In fact, the monetary union has become a political and economic nightmare, plagued by recession, record-high unemployment, social unrest, and rising distrust among member states.

But, even as politicians and economists run out of arguments in favor of the euro, few dare to challenge its fundamental structure, let alone propose alternatives. To escape the crisis, EU leaders must recognize the shortcomings of the eurozone’s one-dimensional framework, and develop a system better suited to managing a multi-faceted monetary union.

Excessive centralization and harmonization are decimating the subsidiarity and competition needed to drive Europe’s economies, as the socialization of debt undermines weaker economies’ accountability. Furthermore, closing competitiveness gaps – essential to saving the euro – would not only require weaker economies to become more productive; strong economies, like Germany, would face pressure to become less efficient, diminishing Europe’s overall competitiveness vis-à-vis the rest of the world.

At the same time, the euro crisis is inciting suspicion, antagonism, and new divisions in the eurozone. German-French relations, once the cornerstone of European integration, are at their lowest point in decades. And unemployed young people in Greece, Portugal, and Spain routinely protest against “German dictates.”

Likewise, the rift between the eurozone’s 17 members and the other ten EU countries is widening. Most notably, the United Kingdom is seeking to renegotiate the terms of its EU membership, with a referendum on the outcome that will determine whether it leaves the EU altogether.

Historical precedents indicate that forcing disparate nations and states to unite under a single idea – whether communism in the Soviet Union, socialism in Yugoslavia, or a shared currency in the eurozone – generates centrifugal forces that can trigger the union’s collapse. A one-size-fits-all approach to integration is simply unsustainable.

But the eurozone is not only replicating other unions’ mistakes; it is repeating its own. While 25 of the EU’s 27 governments agreed to the “fiscal compact,” aimed at imposing fiscal discipline on member states, there is no guarantee that governments will not violate the rules, just as they violated those established by the Maastricht Treaty.

Similarly, although the one-size-fits-all monetary policy contributed to Greece’s excessive indebtedness, and to Spain’s real-estate bubble, eurozone leaders have consistently sought to re-align interest rates, for example, by compelling holders of Greek debt to accept “haircuts” (write-downs on principal). But the impact is severely limited without external devaluation, which is impossible within a monetary union.

While Greece’s eurozone partners may be able to carry it for decades this way, and even to bail out Spain, the system would surely collapse under the weight of a larger economy. And such an economy – France – is in serious jeopardy.

In 2011, France’s ratio of new debt to GDP was three times higher than Germany’s, with the public sector accounting for more than 56% of national income. Currently, 9% of French citizens are employed by the government, compared to 5% in Germany. And unemployment hovers above 10%, with youth unemployment far higher, at roughly 25%.

While some of France’s largest companies – like Michelin, LVMH, and Air Liquide – remain successful, they cannot offset the economy’s lack of a solid base of small and medium-size enterprises. As a result, France’s competitiveness is deteriorating. Indeed, its ranking on the World Economic Forum’s Global Competitiveness Index fell from 18th last year to 21st this year (Germany ranked sixth both years).

Recent actions taken by President François Hollande’s government – including raising the minimum wage, increasing taxes on business, and lowering the retirement age for some workers – threaten to exacerbate the situation. Given this, it is no surprise that Moody’s downgraded France’s credit rating last year.

But, like the struggling countries of southern Europe, France has few options. Austerity programs have been largely counterproductive, generating vicious cycles of slow or no growth, business closures, skyrocketing unemployment, and tax-base erosion. As a result, the eurozone’s fiscally sound countries are being asked repeatedly to compromise their prudent policies in order to finance endless bailouts.

This situation is untenable. Europe’s leaders must pursue a controlled segmentation of the eurozone, in which the most competitive countries – Austria, Finland, Germany, and the Netherlands – adopt a new currency, the “northern euro.” This new monetary union would be managed according to the original Maastricht Treaty, with a truly independent central bank responsible for regulating the northern euro’s exchange rate against the euro, which less competitive countries would retain.

The rump euro’s weakened exchange rate would lead to renewed economic growth, job creation, and a stronger tax base in southern European countries. Initially, to facilitate debt reduction, bondholders would face another haircut. Countries departing for the northern euro should make a one-time contribution to these debt-reduction efforts. A flexible membership system would enable countries to join the northern euro when their economic and fiscal conditions became strong enough.

Europe’s leaders must stop treating the eurozone as a homogeneous entity, imposing one-size-fits-all policies on vastly different countries. The euro’s framework should be adjusted to suit current fiscal and economic realities – not the other way around.

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    1. CommentedMarco Cattaneo

      Avoiding a euro break-up is indeed possible: weaker eurozone countries should issue their own monetary instruments, to circulate ALONGISIDE the euro, and use them to reduce taxes on labor so to realign competitiveness with Germany.

    2. CommentedEdward Ponderer

      Yes -- but let us realize that all don't fit one size is also a sign of the ever-growing specialization under globalization. This transition from independent to interdependent entities, re-emphasizes the crucial need for not just unification of the European organ-system, but of the global Humanities body as a whole.

    3. CommentedZsolt Hermann

      I would like to argue with some of the points raised in the article:

      1. "...In fact, the monetary union has become a political and economic nightmare, plagued by recession, record-high unemployment, social unrest, and rising distrust among member states..."

      Although the unbalanced, artificial structure within Europe contributed to those negative scenarios, it is not the main cause. The main cause is the global crisis, more precisely global system failure as the unnatural and thus unsustainable constant quantitative growth economic model, excessive consumer society exhausted itself, and now turned self-destructive. All the above mentioned negative scenarios are already present everywhere else outside of Europe or are becoming obvious from day to day.

      2. "...A one-size-fits-all approach to integration is simply unsustainable..."

      Although "one size fits all integration" is also unnatural, as each individual and nation is unique and this uniqueness needs to be preserved, the main problem is the lack of integration.
      At the moment in Europe they left everything separate, different, except the financial institutions and the common market.
      In a natural, integral system integration is either complete, or there is no integration at all. Such scenario as partial integration cannot exist.
      Thus a financial construct, a single currency cannot exist without full, supra-national integration in between the participating nations and individuals.

      The solution is to create such a fully integrated system, where each element can preserve its uniqueness, its 100% beneficial contribution, but still all elements are mutually integrated, they mutually complement each other, primarily for the benefit of the whole, and receiving in return everything that they need for a comfortable natural, modern lifestyle.
      Except humans the whole natural reality, including our own healthy biological body operates based on these principles.
      Humanity has to start changing, adapting to the obligating natural system around by changing our lifestyle, the goals we pursue in life (instead of chasing material possessions, material wealth, accumulation, we need to aspire for healthy, mutually contributing connections for example), and the way we create family, national, and international relationships.
      The human species has to become fully compatible with nature's system.

    4. CommentedAntónio Correia

      I agree that "In fact, the monetary union has become a political and economic nightmare, plagued by recession, record-high unemployment, social unrest, and rising distrust among member states".

      The Euro is a shaky construction: besides ignoring the macroeconomic imbalances within the EU, in the "Maastricht criteria" for Eurozone membership as well as in the subsequent "stability" pacts, the Euro has been designed and confirmed – by Delors et al and followers – as a "single currency" instead of a (much more realistic) "common currency". Now, it is very clear that this was an IRRATIONAL choice, namely because other components of Delors's dream are missing - such as a European budget amounting, at least, to some "3% [!] of the European GDP".

      Two decades after the Maastricht Treaty, a COMPLETELY NOVEL EU TREATY is mandatory - not a mere set of "positive" , incremental amendments -, so as to avoid a sad situation, in the near future, where the foreseen "European common home" becomes replaced by a true "European house of correction", not compatible with essential democratic principles. We need to build a true, democratic European Union through a cooperative European disunion, where the Euro survives as a "common", parallel currency - INCLUDING FOR THE UNITED KINGDOM and the other "non-Euro states" - but no longer as the "single currency" for a fraction of the EU (currently 17 out of 27 member states)

      [ ]:

      ” – The Euro should be a COMMON currency within the future EU – including the EU27 members outside the current ‘Euro Area’ – but not necessarily the SINGLE currency.
      - In this context, the coexistence of TWO parallel currencies should be allowed in each EU member state (under certain conditions, established in a novel European Treaty), within the framework of an appropriate “Cooperative European Disunion” .
      - Besides the “Common Euro”, the complementary currency in each member state could be either a “national currency” (…) or a completely new currency, shared by that member state and some other “compatible” EU member states, taking into account both the relevant macroeconomic issues and appropriate geographic, historic and cultural issues."

      We believe that this concise proposal can be a good basis for the required, flexible and realistic, "Plan B" - jointly saving the Euro and the European people.

    5. CommentedGeorge Silver

      Could you please let us know if on the 'excessive indebtedness of Greece' you include private debt? Because if you include private debt to public debt, Greece has very low total debt compared to other nations like Netherlands, UK,USA,Japan,Italy etc. Thank you.

    6. Portrait of Christopher T. Mahoney

      CommentedChristopher T. Mahoney

      Open thinking from a German! What Her Henkel has to say is hard to refute. I have been thinking that the only way to end this agony is for a general, unanimous redenomination into the 17 original currencies. This wouldn't solve all of the eurozone's problems, but it would be the first step on the road to normalization. Insolvent banks because of defaults? No problem when your central bank can create money, and your government can borrow without limit.

        CommentedCarol Maczinsky

        It is not "no problem", just another governance mechanism. Whether you devalue a currency or accept automated haircuts should be the same. furthermore despite the cry and hue the troubled nations are not willing to leave the Euro and the possibility to leave the Union to which they agreed should not be sold too cheap given the undermined trust of the prudent nations.

    7. CommentedHll Dlgz

      Euro can only be legitimized if it is thought as the Union`s rehearsal to claim statehood. If its creation is driven by political objectives originated from the post-war era, the saving efforts are sensible for long term political goals. The thing is that the peace time policy is much concerned on economic conditions, which is very uneven partly thanks to Euro. Therefore, to assess the value of Euro correctly, political goals -if any- and Euro`s suitability to achieve them should be assessed first.