Saving the Euro Will Be Easier Than the Alternative: Clive Crook
One thing nobody can say about the euro-region crackup: We never saw this coming. We saw it coming, all right. Europe’s currency area is falling apart at the very fault lines skeptics described in detail when the plan was still just a plan.
Sovereign-debt crises in peripheral countries? Collapsing governance in Italy? German intransigence on “sound money” and the role of the European Central Bank? Color me amazed.
Europe’s predicament was not just foreseeable but foreseen. Yet Europe’s leaders chose not to plan for it. To do that would have tempted fate and called their commitment to the project into question. They preferred to say, with pride: There is no Plan B. How impressed we all were. Unfortunately, that part was true.
In one way, to be fair, the euro-visionaries who drove this venture have been unlucky. Their system is being tested, perhaps to destruction, 20 or 30 years too soon.
Their hope was that Europe’s new currency would speed the development of a European political identity -- a necessary condition for achieving their larger ambition, a United States of Europe. Once Frenchmen, Germans, Italians and Greeks were citizens of Europe first and of their own countries second, the project would be strong enough to withstand shocks like those of recent months or, better, would avoid them in the first place.
Actually, this made some sense. It was a gamble, but it could have paid off. A European political identity was gradually emerging. You don’t need to reflect long on 20th century history to understand how valuable that would be. Closer political and economic integration across the European Union -- adopting the single currency was both at the same time -- would accelerate the process, as well as delivering big economic benefits in the interim.
Trouble was, it needed time to bed down. The institutions of collective EU policy had already moved ahead of public opinion. Adopting the single currency was never backed by most Germans. In referendums elsewhere on EU constitutional innovations, voters often needed to be asked more than once before they got the right answer. European voters are accustomed to being bossed around by their politicians, but even they have their limits.
Popular support had to catch up before the institutions of EU government could be developed much further. That would need to happen for the euro to succeed. Europe’s elites were relaxed about it: by now this was standard operating procedure. Thanks to U.S. subprime mortgages, the test came too soon.
No Fiscal Union
Europe’s recent disarray arises from the governance gap that this plan deliberately tolerated. Cycles of boom, bust and acute fiscal stress in the peripheral countries happened, in part, because the EU failed to insist on restraint when the new euro members were first able to borrow on far better terms. Now, in responding to the crisis, the EU is hobbled in the end because there is no fiscal union. The question of national identity has suddenly come clear -- nobody wants to pay taxes to help foreigners.
The euro-visionaries’ grand strategic error was to try to have it all. At certain critical points, the EU faced the choice of (a) deepening the political integration of its existing members and (b) broadening the membership to more distant cultural neighbors with less advanced economies and less reliable governments.
The right thing was to do one or the other. Build an ever closer union of similarly advanced and like-minded countries, willing to share a currency and pool their sovereignty; or choose a wider but shallower union, akin to Nafta, confined largely to free trade. The EU wanted both: deeper and wider. That was the crucial error.
Few Choices Left
The question now is whether Europe still has those choices. I seriously doubt it. The euro zone might collapse altogether -- currency unions have done so before -- but an orderly dismantling is all but impossible to imagine.
What politicians have built, you might argue, politicians can unbuild. It isn’t nearly so easy. When you put a currency union together, parities are fixed. When you take one apart, they are freed: Why else dismantle the union but to let exchange rates move? That obvious asymmetry has large consequences. Who would hold a deposit in an Italian bank if Italy were expected to abandon the euro? The new lira, in which those deposits might soon be denominated, would depreciate at the instant of its creation. The mere prospect would trigger a systemwide bank run.
New Financial World
This is to say nothing of the vast legal and technical complications that abandoning the euro would involve. When previous currency unions collapsed, they did so in far simpler financial times. The mechanics of reintroducing national currencies were tractable. They no longer are.
Financial integration in the euro area is total. Borders to financial flows don’t exist. Transactions are virtual and instantaneous. The pattern of cross-border euro-denominated obligations is unfathomably complex. Which of those contracts would be redenominated? On what terms? Who would decide?
Some choices cannot be undone. In this new financial world, short of an economic cataclysm, it is hard to know what abandoning the euro even means.
Nonetheless, we may suffer the profound misfortune of finding out -- unless Europe’s governments see that the only sane choice is to accept the logic of the currency union they created and the obligations that go with it. In the medium term, that means closer fiscal union. In the immediate term, it means one thing above all. The European Central Bank must be granted whatever powers it may need to underwrite public debts across the EU.
This is something the euro’s creators vowed would never happen. It violates, they believed, every principle of sound central banking. They were right: later, those principles will have to be rewritten. Later, too, the euro area will need new arrangements that bring fiscal union closer. Right now, though, the euro area needs a central bank that can do for its member countries what the Federal Reserve does for the U.S. Anything less would be the EU’s biggest gamble yet.
(Clive Crook is a Bloomberg View columnist. The opinions expressed are his own.)
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