Latest posts by Cedric Algoed (see all)
- Chronicles of Nauru: Outsourced - 13/09/2016
- Brave New Euro - 02/09/2016
- Goodbye, FARC? How to end the world’s longest civil war - 18/07/2016
Many economists weighed in on the persistently sluggish economic performances of European countries. On August 16, Nobel Prize winner Josef Stiglitz released his new book The Euro: How a Common Currency Threatens the Future of Europe. Yes, the title is misleading. Stiglitz argues that economic integration outpaced political integration. Barring an institutional overhaul, it could mean the end of Europe as we know it. It’s one of the few things economists actually agree on.
In the golden years everyone, but Germany, profited from the new currency. The Mediterranean countries especially benefited from the huge drop in interest on government bonds, which enabled them to spend more money. Many countries built up debt despite mechanisms in place to prevent that. At one point the music had to end. In 2008, the American housing bubble catalysed a global crisis, which then turned into a Euro-crisis. It made us wonder whether stagnation is the new normal.
A government can stimulate the economy through either fiscal or monetary measures. In the case of the Eurozone, the European Central Bank (ECB) has assumed full and independent power over monetary measures. The distribution of responsibilities damages their individual effectiveness. The ECB conducts a one-size-fits-all policy. Yet, the economic performance of countries differs greatly. Their business cycles never synchronized. The ECB had to maintain an interest rate too low for some and too high for others. On top of that, the common currency prevents countries to devaluate; one of the most effective methods to kick-start an economy.
This problem of diverging economies has been recognized for a long time. There was never enough political will to address this problem comprehensively. Several not-so-great mechanisms were implemented instead. The Stability and Growth Pact, for example, prescribed that budget deficit could not pass 3 per cent of GDP, but France and Germany were among the first to relax the rules. The introduction of the Euro was a BYOB-party, without anyone bringing drinks. It resulted in a crippled monetary union unaccompanied by a fiscal and a political arm.
Since the crisis the biggest structural overhaul was the introduction of a banking union, which monitors the biggest banks and guarantees private deposits up to 100,000 Euros. Undeniably important, the banking union will not prevent future crises (and remains relatively dysfunctional). It only aims to prevent collapsing banks and bank runs. A banking union will not synchronize European economies. The Eurozone needs a fiscal union in which it can tax and spend directly.
We can justifiably ask ourselves why the Euro is necessary in the first place. Do we really need to go through all this reform-hassle? It’s just a coin isn’t it? Giving into these demands will be devastating to the European project. It is preposterous to think that abandoning the Euro has no impact on other aspects of the EU. Who guarantees that Schengen or the Single Market will not come under pressure? The Euro is the most prevalent product of integration. Its disappearance would have far-reaching consequences.
It is also the reason why we cannot return to a core of Euro-countries. In spite of the serious competitiveness differences, it would be a political kamikaze to kick out several other countries. Some have argued that even a fiscal union will not solve these fundamental differences. There is however, no other choice than to take the gamble.
Crises are also promising moments. Politicians need crises to optimize institutions. Yet, this time it’s different. The rise of Euro-sceptic parties casts a shadow over the viability of the European project. The UK is not a Euro-country, but in coming months Italy, France, Netherlands, Germany and Austria will be holding elections. In all five countries Euro-sceptics could seize power. The EU will then be happy to maintain a status quo, instead of implementing the much-needed measures to strengthen the Euro. Relying on the current incomplete monetary union will result in a slow, painful suicide.
To avoid a crash, we need to integrate. It is an ambitious idea in the current political climate. The rise of Euro-scepticism is a self-fulfilling prophecy. Attempts to fix the Euro are blocked. Maintaining a status quo will undoubtedly lead to new crises, more resistance, and eventually the end. If we want to revive the Euro we have to be brave, give up our sovereignty, and move towards a fiscal and political union.