The euro is stuck in purgatory. Heaven seems ever further away. And with the Italian political crisis, hell seems closer than ever.
In the past, I have called the introduction of the euro the most destructive political act since World War II. The flawed architecture on which the euro was built was there for all to see. So the question arises as to why it was done. Why so many experienced politicians and policy makers pushed forward with an obviously flawed project.
The euro was part of a dream. A dream of ever closer union among European member states. Through an architecture that relied on fiscal discipline across the Eurozone, each country would build a thriving economy on the German model.
Then there was the politics. Helmet Kohl was bounced into accepting the euro as a condition for French support of German unification. He was not in a position to refuse in spite of widespread German scepticism.
Slowly, the dream has turned into a nightmare. Instead of fiscal discipline, the euro led to a debt explosion in Southern European countries which suddenly found that they could borrow at rates that were well below what they would have been had they retained their own currency.
Germany and the Netherlands suddenly became more competitive as the euro gave them an effective devaluation. Their banks financed the Southern European spending spree on, among other things, imports from Northern Europe. They were effectively financing their own economic boom with Southern European governments as intermediaries.
When the financial crisis hit, Germany, France and others found that they could be on the hook for the debt they financed to boost their own economies.
While priding themselves on the success of their economies, they refused to accept any responsibility for the reckless lending they allowed to happen to finance their own growth. Rather they placed all the blame on reckless Southern Europeans.
Since then, the euro has been an instrument of division rather than unity. With the current Italian crisis, it risks posing an existential threat to the whole European project.
That retrospective is all very well. But it provides no answer about where to go from here. What’s done is done. But what is to be done now?
Unwinding the euro would not only be a terribly complex and treacherous course, it would be a massive humiliation and possibly a terminal blow to the European project. Leaving it as is simply represents a postponement of the evil day when it might blow up.
Another option is wholesale reform. But that is unlikely. There is absolutely no hint of consensus as to which direction such reform should take.
France still sees the euro as an instrument of ever closer union. Macron’s suggestions for mutualising risk are a logical consequence of trying to operate a single currency. The French suggestions are also moderate in that they only allow the mutualising of risk up to an allowed threshold, with any borrowing above that threshold being the responsibility of individual governments.
But none of this will cut any ice in Germany and other Northern European countries. They will refuse to take on any more risk on behalf of their European partners. They continue to forget, or conveniently ignore, the benefits they are reaping from the single currency at the expense of Southern Europe.
They continue to believe their own propaganda that their success is due exclusively to their stellar economic management capabilities. Why not believe such a wonderfully comfortable fable after all?
So it seems to me that there are only two options for the euro. Continued purgatory for as long as possible, or a rapid descent into hell should a major country like Italy do what the current parliamentary majority is threatening to do.
Matteo Salvini, leader of La Lega and Italy’s most popular politician, calls the euro a German cage. He is right that it is a cage. But it’s not German.
France was the driver and governments in his own country and all the others signed up to it knowing its flawed architecture full well. It isn’t and never was a German folly, but a collective folly of 17 national governments.
Where he may be wrong is if he believes that it is possible painlessly to break out of the cage. More than a cage, the euro is like one of those terrible medieval prisons with inhuman conditions that can never be improved, but from which there is no escape save blowing the whole thing up.
And it is here that there is a risk of misjudgement. Northern European countries are simply unable to contemplate the idea that anyone would be so reckless as to simply blow the whole thing to smithereens and bring chaos to a whole continent. To them I offer this quote from Michel Houellebecq’s novel Solitude:
“It may well be impossible for people who have lived and prospered under a given social system to imagine the point of view of those who feel it offers them nothing, and who can contemplate its destruction without any particular dismay.”
Leaders should remember that they have shown themselves perfectly willing to devastate the lives of millions of people in order to save the euro during the financial crisis. They should not be surprised if others might be willing to do the same to bring the euro down.
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Julian Tisi says
What a depressing article. You seem to lay the blame for each and every problem in Europe on the introduction of the Euro and you rather ignore how successful the Euro has actually been, despite its initial problems.
The Euro has been a successful currency – far more so than the Pound over the same period! This is a simple fact conveniently overlooked by the Euro naysayers.
Yes, the Euro has had problems, particularly early on. I agree that the debt problems in Southern Europe were made easier via the introduction of the Euro, as irresponsible governments ignored the Eurozone rules to over-borrow. The early mistake was that while there were reasonable borrowing limits imposed on Eurozone countries (in terms of limits to budget deficits) there were no sanctions for those who broke them. When France announced openly that the limits didn’t apply to them, they gave carte blanche to these fiscally irresponsible countries to borrow at the remainder of the EU’s expense. But let’s be clear what happened here – this was a sovereign debt crisis (lazily called a “Euro” crisis in the UK) caused by the fact that the rules were so lax. However, since then the rules have been tightened, with the sort of sanctions in hindsight the Eurozone ought to have had from the start – yet you suggest that reform is unlikely. Reform has indeed already happened!
Clearly the latest election in Italy is another headwind the Euro will have to face. But before we predict doom and gloom let’s remind ourselves that the Euro has already faced – and seen off – much worse.
Joe Zammit-Lucia says
Thank you Julian for your comment.
I guess it all depends on one’s definition of ‘successful’. Personally I have difficulty describing a currency that was intended to drive unity and that has ended up driving division as a success – whatever the underlying reasons.
You describe irresponsible borrowing in Southern Europe. But there can be no irresponsible borrowing without irresponsible lending. At the very least this is a folie á deaux and both sides have to carry some responsibility.
You are right that part of the problem was the lack of tight rules and their enforcement. However, this was totally predictable – and indeed predicted by many. There is no way that a currency union of sovereign states without fiscal union was ever going to be in a position to enforce hard rules. Particularly since nobody was going to take the only enforcement step that could work – chucking countries out of the Euro if they did not follow the rules. And fiscal union is, for the foreseeable future, impossible to achieve.
It’s hard to buy into the idea that the Euro has been a success when it is a structure where the rules are necessarily incomplete and where even the rules that exist cannot be enforced. To me, your commentary emphasizes rather than diminishes the structural problems at the core of the Euro project. Finger pointing at Southern European countries does not solve the issues. Piling on more rules will not help if they remain, by and large, unenforceable.
A single currency covering a large area that has wide economic disparities, engages sovereign states that jealously guard their fiscal independence, and without mutualisation of risk or meaningful money transfers between regions is hard, some would say impossible, to pull off.