Euro 2.0

The creation of the euro was a purely political decision. There is nothing surprising about that – subjecting a population to a currency is a regalian right. In any case, a currency has to be backed by pledges of confidence that only the State can provide. It is as though the currency were somehow guaranteed by “psychic” units of individual trust in the State which, once gathered together collectively, will ensure its endurance.

But although a currency is a political act, it nevertheless has to rest on sound economic foundations. Economies are always asynchronous. In other words, they evolve at different paces. Otherwise, there would be only one worldwide currency. So, geographically, a currency cannot extend to the whole of a certain area unless the zones covered all have the same economic pulse beat. So there are geographical limits to a joint currency. To put it another way, the same currency cannot cover different territories unless mechanisms are in place to absorb asymmetric shocks, i.e. negative events that affect some of these territories while leaving the others unscathed. For instance, Jean-Luc Dehaene linked the Belgian franc to the Dutch guilder and the deutschmark in the 1990s because those were our main economic partners. He never considered other nations.

The euro was and is premised upon the mobility of the factors of production. The moment that States are constrained by a single currency, it is up to the production factors “labour” and “capital”, meaning people and investments, to move to where the jobs and growth are. And yet, the exact opposite has happened – States’ national hold on capital and labour has tightened. As regards the labour market, things are considerably worse. Europe is threatened by structural unemployment, linked mainly to the failure to integrate young people, the lack of incentives to retrain, the draining away of industrial employment etc. In the financial sphere, there has also been a decline of identity, as public debts have re-migrated to their countries of origin, to the detriment of an integrated capital market.

The upshot is that the euro is genetically weak. The zone upon which this currency has imposed itself is too broad and was constituted too quickly. The euro should have been restricted to a limited number of countries whose economies are intertwined. So the euro zone should have initially comprised only the countries of Northern Europe and then, by “layering”, i.e. by gradual assimilation, it could have spread to the economies of the South, as happened in the cases of Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia and Lithuania. And indeed, prior to the introduction of the euro, the countries of Northern Europe kept their exchange rates stable, whereas those in Southern Europe devalued their currencies. In the 1990s, these countries organised a cascade of massive devaluations so that they could join the euro at depreciated exchange rates, reflecting the weakness of their economies. Of course, the euro could not just conjure that away.

In fact, the euro crisis revealed a growing heterogeneity among the countries that adopted the single currency. Formerly, a country that had fallen by the wayside could devalue its currency and stimulate its exports, albeit at the cost of importing inflation. Devaluation made it possible to juxtapose the currency with the weakness of an economy. But today, the devaluation tool is no longer available. The only kind of devaluation still possible is domestic – i.e. lowering purchasing power in order to increase external competitiveness. In the short term, this policy leads to higher unemployment and to inequalities that may spark social upheavals.

So it would seem that two risks are being underestimated here. The first is monetary. The single currency was adopted without first preparing the euro zone to be an optimal monetary space, characterised by fiscal and budgetary harmonisation and labour mobility. The second risk is of a political nature. The euro is no longer a socially uniting project, and it has even become a source of social resentment in the countries of the South, as the Greek case unfortunately shows. Making a currency more rigid entails accepting that other parameters will shift. So in theory, it is possible that the euro will become a destabilising factor. This risk provokes the thought that, although the euro is legal tender, it is no longer societal tender. The currency is single but no longer common.

But what has been accomplished is irreversible. There is no going back to the previous currencies. At the same time, however, there is unfortunately no longer any desire to move forward with a budgetary, fiscal and financial integration that would deprive the Member States of their sovereign attributes. So there is a risk that the euro will cause centrifugal tendencies unless this currency is rooted in greater financial solidarity, which in turn derives from moral values. Unless the euro gets a political jolt, it may be fated to remain an unfulfilled currency, devoid of any explicit project.

If the euro zone really wants to found a monetary union, it will have to be subordinated to budgetary and fiscal federalisation, as in the United States. There will also have to be an admission that the European Union’s policies cannot be homogeneous. It is quite senseless to submit all the countries of the euro zone to the same blind constraints of structural debt clearance and a return to balanced budgets in line with the Stability and Growth Pact, when in fact the economies of the North and South show different dynamics. Real industrial integration would also have to be implemented. And fundamental change would be needed in the functioning of the ECB. As its sole constraint is to respect inflation, it is just a minimalist monetary institute, far removed from the realities of economic integration. As has been seen, the ECB is independent only in its dependence on certain countries. That is unacceptable. The ECB can exist only through a democratic consent that it now lacks.

If the decision to create the euro was a political decision and not an economic one, matters have to be pursued to their logical conclusion. That means taking on board the political decision to go for European unity. The Nobel Prize winner for economics Milton Friedman predicted back in 1997 that the lack of political unity would be exacerbated by the creation of the single currency. Probably (and sadly), he was not wrong. Today, the currency is indeed no longer buoyed up by joint political enthusiasm. Without decisive willpower and without a monetary policy that reflects a modular economic policy, history may record a slow erosion of confidence in a European project that a currency cannot bring about on its own.

By the yardstick of history, Europe measures up as a marvellous, exceptional case of understanding among peoples, and the euro is a Utopia come true. But in its present incarnation, the euro has remained a monetary artifice that lacks any solid economic bedrock. Without changes in governance, this euro will not survive in the long run, except at the cost of stifling the weak countries. The real challenge is European integration and the modularity of budgetary and industrial policies. Everything could be achieved with the assent of governments who opted for a Community thrust.

We would then have euro 2.0, a second-generation euro.