Common Currency's Existential Crisis
Hey, euro! For a while there, you looked like a goner. During those debt crisis days in 2012 when Greece was imploding and Spain’s banks were teetering and the Germans were asking why they had to pick up the bill, there was a serious wobble. Common European currency? Remind us, please, what Europeans actually have in common. Now with Britain heading out of the European Union and Greece back on the brink (again), there are regular reminders of how many problems it causes. Discontent is fueling the rise of populist politicians, and some are targeting the euro. Can the world’s most ambitious financial experiment survive?
Anti-EU protest parties across the continent have gained support from voters fed up with the failings of other countries and the loss of control to bureaucrats in Brussels. Withdraw from the 19-nation euro is a rallying cry for Italy’s Five Star Movement and Marine Le Pen’s National Front in France, which has rattled investors with promises to redenominate the country’s debt into a new national currency if it takes power after an election in May. Greece is struggling to meet creditors’ demands in return for crucial loan payments again, after surrendering to euro-zone leaders in 2015 to qualify for its third bailout in five years and remain part of the common currency. Months of bitter disagreement and Germany’s insistence on more austerity has left a lingering sense that Greece will have to leave the currency union sooner or later. Europe’s slow recovery from its worst-ever recession hasn’t helped, with euro-zone unemployment holding close to a record 12 percent for three years. The euro dropped by the most on record in June 2016 on the surprise decision by British voters to leave the EU, even though the U.K. is not part of the common currency.
The precursor to the EU was set up in 1958, as the continent’s leaders vowed to make another war between them all but impossible. The euro came 41 years later, when a group of 11 countries jettisoned marks, francs and lire and turned control of interest rates over to a new central bank. The common currency’s scale provided better access to world markets and exchange-rate stability. It did not, however, impose uniform financial discipline; to avoid surrendering national sovereignty, politicians largely sidestepped a unified approach to bank regulation and government spending. While there were rules, they were flouted. The crisis that brought the euro to its knees came during the global rout in 2009, when Greece came clean and said its budget deficit was twice as wide as forecast. Investors started dumping assets of the most indebted nations and borrowing costs soared. The shared euro made it impossible to devalue individual currencies of weaker economies, limiting options for recovery. Politicians lurched through bailouts for Greece, Ireland, Portugal and Cyprus plus a rescue of banks in Spain. The panic fueled fears of a breakup as fragile banks exposed the common currency’s vulnerabilities. The firestorm abated in July 2012, when European Central Bank President Mario Draghi pledged to do “whatever it takes” to save the euro.
Euro-area leaders say the common currency is now more resilient in the face of shocks. They argue that even if Greece were to fall out of the euro, the currency would survive, though there's a vigorous debate about the economic and political consequences. New systems have been put in place to centralize bank supervision and build firewalls between troubled debtors and taxpayers. The measures still may not have gone far enough. Aspirations by the euro's founders for an "ever closer union" — including more oversight of national budgets and the pooling of debt — have not been realized and the euro’s flaws could sow the seeds for another crisis. There's a regular chorus of business leaders, analysts and politicians who say that the currency's structural deficiencies mean its demise is just a matter of time. Existential doubts about the common currency remain.
The Reference Shelf
- Experts weigh in on scenarios of how the euro could break up — or be saved.
- Bloomberg View columnist Jean-Michel Paul examines waning support for the euro, and economist Barry Eichengreen argues that it's here to stay.
- A Q&A explainer on populism and a QuickTake on the Britain's referendum on leaving the EU.
- Bloomberg Intelligence looked at what’s wrong with the euro area and how to fix it.
- Bloomberg Markets explored how the rivalry between Greece and Germany would shape the future of Europe.
- The Euro: How a common currency threatens the future of Europe, a book by Nobel Prize-winning economist Joseph Stiglitz.
- Angela Merkel: A Chancellorship Forged in Crisis, a book by Alan Crawford and Tony Czuczka.
- Bust: Greece, the Euro and the Sovereign Debt Crisis, a book by Matthew Lynn.
- ECB President Mario Draghi’s July 2012 speech pledging to do “whatever it takes” to save the euro and the European Commission’s November 2012 blueprint for a deeper economic and monetary union.
First published April 10, 2014
To contact the writer of this QuickTake:
Ian Wishart in Brussels at firstname.lastname@example.org
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