The future of the Euro

As I mentioned in yesterday’s post, the Eurozone economy is growing surprisingly well. The countries of Southern Europe are recovering strongly from the recession and sovereign debt crisis, and now all of them are growing at a faster rate than an increasingly lethargic Britain. However, there is a broad consensus that the Eurozone is vulnerable any future economic shocks. The interest rate is 0.05%, and Euro rules forbid a big bong buying programme, significant quantitive easing or any sudden currency devaluation, making monetary stimulus virtually impossible. Unlike other currency unions, the Eurozone has no central authority with control over fiscal policy. So if a region needs bailing out, it cannot be done quickly and effectively.

There are a few responses to this conundrum. The first would be some form of fiscal union, as advocated by Emmanuel Macron, Martin Schultz and most of the pro-EU social democrats. Eurozone members would pay into a common budget, which would then be used to redistribute wealth, offsetting any potential losses of being a part of a common currency. Thus, the benefits of the Euro would be maintained, while preventing any countries from falling too far behind. This already happens in the United States, where federal funds are used to subsidise poorer states, while maintaining the strength of the dollar for the country as a whole.

The European Commission opposes those reforms on the basis that it would empower the European Central Bank and the potential new office of a Eurozone finance minister at the Commission’s expense. Thus, a two-tier Europe would be created. Instead, the Commission wants any fiscal powers to be under their control. The problem is that virtually all of the EU’s member states are opposed to giving the Commission that much power. Germany would prefer any permanent bailout mechanism to be an intergovernmental instition, and thus subject to a German veto.

The overall point is that no one can agree on what Eurozone reform should look like, even if everyone agrees that reform is needed. Amongst those who want more integration, they cannot agree as to whether it is the Commission, a new Eurozone system of governance, or an intergovernmental monetary fund that should hold any additional powers. There is a small minority of people who would go even further and create a federal EU, or ‘United States of Europe,’ though that is a fringe position. Then there are moderately Eurosceptic fiscal conservatives who oppose Eurozone integration, because it would result in permanently higher taxes for wealthier countries, even if the benefits of an artificially weak and widely used currency offset those additional taxes. Then of course, are those who would abolish the Euro, but again that is a fringe position.

My problem with the Euro is a lack of trust. There are sensible rules regarding keeping deficits down and honestly reporting how much your country is raising in taxes. But prior to the recession, many countries, Greece especially, broke those rules. As a result, any further Eurozone integration is problematic if irresponsible countries will use the privilege of fiscal union and low interest rates to borrow recklessly. I agree with the fiscal conservatives- there shouldn’t be any pan-European redistribution of wealth, however temporary or irregular. If some Eurozone members find themselves unable or unwilling to comply with the Euro’s rules, then they should leave. If that upsets the countries who want the benefits of the Single Currency without accepting the risks, or the fringe group of federalists who regard any country leaving the Euro as a disaster, than so be it.

For more information, I would read this FT article¬†https://www.ft.com/content/47c734d8-e1af-11e7-8f9f-de1c2175f5ce. But I believe the article makes too strong a distinction between Macron and Schultz’s believes, which regarding the Euro, are essentially identical.