I was reading the ever-fascinating Martin Wolf in The Financial Times the other day as he bluntly laid out the stark choices facing Europe’s great experiment with the euro:
The eurozone, as designed, has failed. It was based on a set of principles that have proved unworkable at the first contact with a financial and fiscal crisis. It has only two options: to go forwards towards a closer union or backwards towards at least partial dissolution.
Which route will Europe take? So far, its leaders seem to be heading towards some sort of greater integration – albeit grudgingly, and with many reservations. In recent months, Europe has increasingly accepted reforms that aim to strengthen the monetary union – a permanent bailout fund, stricter rules on fiscal management, more euro zone oversight of national economic policy and guidelines to improve the zone’s competitiveness. On Thursday, European Central Bank President Jean-Claude Trichet suggested taking such steps further, even recommending the formation of a finance ministry for the euro zone. Dissolution has simply not been on the table.
But should it be? As the divergence between what the euro promised and what it has delivered grows wider, and the cost of maintaining the common currency escalates, I think that’s a question worth asking. There are reasons to argue that Europe would be better off today if it just scrapped the euro altogether.
The euro was supposed to be a tool to build up Europe’s economic strength, to unleash the continent’s potential and make it a better competitor to the U.S. and Asia. With a common currency, Europe’s individual nations could reduce the costs of doing business, solidify a large, home market, and offer the world an alternative reserve currency to the greenback. And what’s actually happened? Instead of a single, vibrant European economy, the euro has produced a two-speed zone. Some nations, especially Germany, have been able to capitalize on the benefits of monetary union due to their superior competitiveness, while for other, less competitive economies, such as the PIIGS, the euro has brought debt, deficits, unemployment and economic stagnation. Instead of an economically strong Europe, asserting itself on the global stage, the flaws within the euro system have produced a debt crisis that threatens the region’s standing in the world and fosters instability in international markets. Instead of a true rival to the dollar, the euro has been exposed as potentially only as strong as its weakest links.
Of course, the euro’s goals were not solely economic. As Steffen Kampeter of Germany’s finance ministry pointed out to me last year, what many observers fail to appreciate is that monetary union was also meant to ensure peace in Europe. And what of that notion? The debt crisis has exposed worrisome political divisions within Europe. The strong nations are imposing their will on the helpless. Avoiding debt restructurings to protect their own banks and interests, the strong of Europe are forcing the entire process of reform onto their indebted neighbors. Meanwhile, rather than bolstering European cooperation, the euro has caused the zone’s leaders to descend into almost constant bickering over how to fix the monetary union. The measures taken have sparked political disagreements in almost every European capital. Angry citizens have taken to the streets to protest. The euro seems to be driving Europe apart, not bringing it together.
Meanwhile, as the benefits from the euro dwindle, the costs of maintaining it escalate. As Europe inches towards a second, expensive bailout of Greece, the financial burden of the euro on the richer euro zone nations continues to expand. Meanwhile, the weaker nations are facing years and years of economic pain due to austerity measures and reforms. Unable to devalue their currency, a simple way of regaining some cost competitiveness, the euro forces a torturous reduction in wages and living standards. Increasingly, the struggling economies are facing a loss of sovereignty as well. Europe’s leaders are bouncing around the idea of forcing Greece to accept outsiders to manage the country’s privatization program and perhaps even aspects of its tax system. Politically, the costs are rising as well. From Ireland to Spain, politicians associated with euro zone debt crisis policies are one by one being sent into retirement by dissatisfied voters.
And what would the consequences be if Europe decided to do away with the euro? Obviously, a Europe with a euro that actually works would be better off than a Europe with multiple currencies. But getting to that more perfect union would entail of degree of commitment that we have yet to see from Europe’s leadership. The euro’s failings are a result of its ambivalence towards integration – the desire to reap the benefits of union without the costs to political sovereignty. That hasn’t changed, and until it does, the euro won’t be fixed. The indecision in the face of the debt crisis is proof that Europe is willing to go only so far to keep the euro zone intact.
At the same time, there are clear advantages to ridding Europe of the euro. Countries now suffering with debt could return to their national currencies, devalue, and regain competitiveness more easily. Sure, they wouldn’t enjoy the same financial backing and support from the richer euro zone states, but their freedom would also allow them to chart their own course, negotiating debt restructurings that would bring about a more fair division of losses and probably put their economies on a stronger potential growth path. The richer countries like Germany would be absolved of the political and economic burden of bailouts. And Europe’s companies would still enjoy the benefits of the continent’s long-standing common market. And would Europeans return to its bad old days of incessant wars and conflict because they weren’t all using the same coins? I highly doubt it.
So what we have here is a monetary union that is generating diminishing returns while demanding a heavier investment. Any investor or CEO would realize it was time to get out and cut your losses. Will Europe?