The Flawed Euro
June 23, 2012Posted by on
A fundamental flaw in the initial design of the euro made it unlikely that it could ever succeed and the determination to continue with economic policies, particularly in response to the global financial crisis, have made recovery from that crisis more difficult. A single monetary policy dictated by and serving the needs of the most powerful parts of the European economy, would be less appropriate for weaker parts of the European economy. The Greeks believed that their membership of the euro-zone was the entry ticket to the prosperity that the stronger members enjoyed. Encouraged by the apparent guarantee of support from those stronger members to take advantage of the asset inflation created by easy Europe-wide credit, ignoring the potentially damaging concentration of productive capacity in Europe’s industrial heartland that a single economy made inevitable. In the longer term, when the periphery of the wider European economy began to slow down – even to close down – this was bad news even for the central core, whose markets would be less buoyant and whose obligations to weaker members would be likely to increase – because the euro would eventually handicap the whole European economy.
The economic dominance of Germany in the euro-zone and the measures adopted to help Europe escape from recession have been largely dictated from Berlin reflecting a particularly German view of what is required. Those measures focused on the vulnerability of governments in weaker countries to rapidly increasing public sector deficits – deficits made inevitable by the constraints imposed by euro membership and by the impact of the global financial crisis on the relatively loose policies pursued by those countries within the apparent comfort of the euro-zone. Increasingly nervous that they would be required to finance any rescues that might be needed; the German government’s own domestic political and ideological preferences (themselves now increasingly challenged within Germany itself), all pointed strongly to austerity as the correct response to recession. This has worsened problems within the euro-zone and particularly those of its weaker members (the inevitable consequence of austerity).
An economy that becomes uncompetitive responds with a range of measures that usually include the devaluation of the currency, an option not open to euro-zone members. Without it, they could only grow themselves out of recession with the aid of a policy framework, in terms of both monetary and fiscal policy, that would encourage greater rather than less economic activity. The insistence that Greece and Ireland, Portugal and Spain, and perhaps eventually Italy as well, should cut spending and reduce demand in order to eliminate deficits has ensured that recession becomes persistent and almost impossible to shake off.
The “troika” of the European Commission, the IMF and the European Central Bank have, through a failure of analysis, ignored the actual causes of the euro-zone crisis, they have accordingly continued to press for exactly the wrong remedies. The remedies proposed intensify the burdens of both euro membership and austerity. The burdens of euro membership have been too much for many members, yet no attempt has been made to distinguish between those countries that have prospered and those that have not, or to suggest refinements of the rules that might help those that have not. Those that have economic difficulties are now being told that if they want help they must accept still tougher rules within a banking union. This would make it even less possible for them to grow and repay debt and would require them to concede what remains of their economic sovereignty.
Europe as a whole is handicapped by – rather than benefited by – the current breadth of the euro-zone, and that it cannot possibly function well with such diverse membership. There should be a negotiated process for identifying those countries that would benefit from being, or that wished to be, released from the burdens of membership and for helping them to make an orderly withdrawal. Such a process would be complex and difficult, but by no means impossible, and in any case would be less disruptive than a disorderly break-up that otherwise seems inevitable.
Countries which chose to leave the euro-zone would be able to return to their individual currencies, devalue to the appropriate level, abandon austerity in favour of a strategy for growth, and re-negotiate their obligations with creditors on the basis of a credible prospect of improving tax revenues. No one would pretend that this process is without problems, still less choose to start from here, but other countries, such as Brazil and Argentina, have negotiated similar issues and come out on the other side with improved prospects.
The numbers of countries choosing to take this option might swell in due course once the practicality and advantages of opting out of the euro became clear. They could then set about, together both with the euro-zone and actual and potential European Union members who are not members of the euro-zone, the task of building a new kind of European cooperation in which the process of ever-increasing convergence in the pursuit of common interests did not get too far ahead of the political and economic realities.
In economic terms, Europe would be much stronger as an entity if the constituent parts were able to apply monetary and exchange rate policies that were more suited to their needs and in particular to their different stages and rates of development. A Europe made up of economies each enjoying optimal macro-economic policy settings, trading with each other on special terms and negotiating trade arrangements with the rest of the world as a single entity, consciously pursuing convergence across the whole field of regulation , coordinating and aligning policy development wherever possible, increasingly working together in pan-European deliberative and eventually legislative bodies, would serve Europe’s economic interests much more effectively and do more to promote a genuine sense of European identity than the current abortive attempts to impose from above a European super-state. A State that only a tiny elite has ever wanted.
To acknowledge that there is not yet a United States of Europe, with a single political identity that makes it possible to accommodate without undue strain a range of divergent economic interests, is not to admit defeat but to recognise the need to build a Europe on the basis of democracy and popular will if the result is to be sustainable. The euro-zone crisis may in the end be a blessing in disguise.