How Long Can the Eurozone Survive Without Greater Integration?

Does a reform-minded president in France and the likely re-election of German Chancellor Angela Merkel mean new hope for Europe’s stalled single-currency project? Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, takes a closer look.



With a reform-minded centrist president elected in France and the re-election of German Chancellor Angela Merkel seeming ever more likely, is there new hope for the stalled single-currency project in Europe?

In the near term, it looks that way. The eurozone recovery has out-performed expectations, and the election of Macron has raised hopes that France could become a full partner to Germany in eurozone governance.

But in the long term, it is hard to see how much longer the euro can trudge on without massively greater political and economic integration. Greece, after more than 25% drop in per capita income, is still barely growing. Italy’s real income is lower than a decade ago. And so forth. For southern Europe as a whole, the single currency has proved to be a golden cage, forcing greater fiscal and monetary rectitude but removing the exchange rate and inflation as critical cushions against unexpected shocks.

And for what? Eurocrats have long likened European integration to riding a bicycle: one must keep moving forward or fall off. If so, the premature adoption of the single currency, which most economists think was never necessary to the EU’s success, has been a detour through wet cement.

The question now is how to maneuver the EU out of the mire. Although many European politicians are loath to admit it, the status quo is probably not sustainable. The euro is bound to face another major stress test over the next decade, perhaps emanating from China, perhaps a rise in global real interest rates. And the eurozone is nowhere near ready to handle it.

But if the eurozone’s long-term prospects are so precarious, why are ten-year Italian bonds yielding not even two percentage points more than Germany’s?

Maybe investors believe that outright bailouts or mutualisation of debt is inevitable. Or maybe they’re gambling that the southern countries have sunk so far into the cement they won’t get out no matter how bad things get.

Either way, eurozone leaders would be better off acting now, rather than waiting for the moment of truth. How long today’s optimism lasts is for Macron and Merkel to decide.