PRINCETON – The alternatives for Europe’s currency, the euro, seem increasingly limited to a desperate muddling through or a chaotic collapse. But there is a bolder and more productive approach that relies on past experience with multiple currencies.
The threat posed by Europe’s current policy impasse can hardly be overestimated. In the early 1930’s, monetary-policy incoherence paralyzed US policy, with the Federal Reserve Bank of New York locked in insurmountable conflict with the Chicago Fed over monetary easing (at that time through open-market securities purchases). Today’s chronic policy disputes between Germany and France are producing a level of uncertainty that is potentially even more destructive.
Every few months, European governments launch a new and ever more ingenious initiative to resolve the eurozone’s debt crisis. For a day (and sometimes only for a few hours), financial markets rally euphorically. But soon doubt sweeps back in. There is no sense of a realistic endgame. And there is no longer-term vision of how the fiscal integration needed for the effective operation of a monetary union could be achieved in a practical timeframe.
Europeans should look to the past, when previous crises produced innovative solutions. The extended crisis of the European Monetary System (EMS) between September 1992 and July 1993 looked as if it would derail European integration. What was initially seen as a problem in one country (Italy) toppled other currency regimes like dominos: Britain, Spain, and Portugal – and, by July 1993, even France was vulnerable. Then, as now, Europe’s future was at stake.