MANNHEIM – The European Union’s policy of saving the euro at all costs is enough to guarantee the euro’s survival. But is preserving the “one-size-fits-all” euro really worth sacrificing the eurozone’s competitiveness and, ultimately, European solidarity?
It was the single market’s establishment in 1992 – not the euro’s introduction seven years later – that brought free trade, increased competitiveness, and new wealth to Europe. In fact, the monetary union has become a political and economic nightmare, plagued by recession, record-high unemployment, social unrest, and rising distrust among member states.
But, even as politicians and economists run out of arguments in favor of the euro, few dare to challenge its fundamental structure, let alone propose alternatives. To escape the crisis, EU leaders must recognize the shortcomings of the eurozone’s one-dimensional framework, and develop a system better suited to managing a multi-faceted monetary union.
Excessive centralization and harmonization are decimating the subsidiarity and competition needed to drive Europe’s economies, as the socialization of debt undermines weaker economies’ accountability. Furthermore, closing competitiveness gaps – essential to saving the euro – would not only require weaker economies to become more productive; strong economies, like Germany, would face pressure to become less efficient, diminishing Europe’s overall competitiveness vis-à-vis the rest of the world.
At the same time, the euro crisis is inciting suspicion, antagonism, and new divisions in the eurozone. German-French relations, once the cornerstone of European integration, are at their lowest point in decades. And unemployed young people in Greece, Portugal, and Spain routinely protest against “German dictates.”
Likewise, the rift between the eurozone’s 17 members and the other ten EU countries is widening. Most notably, the United Kingdom is seeking to renegotiate the terms of its EU membership, with a referendum on the outcome that will determine whether it leaves the EU altogether.
Historical precedents indicate that forcing disparate nations and states to unite under a single idea – whether communism in the Soviet Union, socialism in Yugoslavia, or a shared currency in the eurozone – generates centrifugal forces that can trigger the union’s collapse. A one-size-fits-all approach to integration is simply unsustainable.
But the eurozone is not only replicating other unions’ mistakes; it is repeating its own. While 25 of the EU’s 27 governments agreed to the “fiscal compact,” aimed at imposing fiscal discipline on member states, there is no guarantee that governments will not violate the rules, just as they violated those established by the Maastricht Treaty.
Similarly, although the one-size-fits-all monetary policy contributed to Greece’s excessive indebtedness, and to Spain’s real-estate bubble, eurozone leaders have consistently sought to re-align interest rates, for example, by compelling holders of Greek debt to accept “haircuts” (write-downs on principal). But the impact is severely limited without external devaluation, which is impossible within a monetary union.
While Greece’s eurozone partners may be able to carry it for decades this way, and even to bail out Spain, the system would surely collapse under the weight of a larger economy. And such an economy – France – is in serious jeopardy.
In 2011, France’s ratio of new debt to GDP was three times higher than Germany’s, with the public sector accounting for more than 56% of national income. Currently, 9% of French citizens are employed by the government, compared to 5% in Germany. And unemployment hovers above 10%, with youth unemployment far higher, at roughly 25%.
While some of France’s largest companies – like Michelin, LVMH, and Air Liquide – remain successful, they cannot offset the economy’s lack of a solid base of small and medium-size enterprises. As a result, France’s competitiveness is deteriorating. Indeed, its ranking on the World Economic Forum’s Global Competitiveness Index fell from 18th last year to 21st this year (Germany ranked sixth both years).
Recent actions taken by President François Hollande’s government – including raising the minimum wage, increasing taxes on business, and lowering the retirement age for some workers – threaten to exacerbate the situation. Given this, it is no surprise that Moody’s downgraded France’s credit rating last year.
But, like the struggling countries of southern Europe, France has few options. Austerity programs have been largely counterproductive, generating vicious cycles of slow or no growth, business closures, skyrocketing unemployment, and tax-base erosion. As a result, the eurozone’s fiscally sound countries are being asked repeatedly to compromise their prudent policies in order to finance endless bailouts.
This situation is untenable. Europe’s leaders must pursue a controlled segmentation of the eurozone, in which the most competitive countries – Austria, Finland, Germany, and the Netherlands – adopt a new currency, the “northern euro.” This new monetary union would be managed according to the original Maastricht Treaty, with a truly independent central bank responsible for regulating the northern euro’s exchange rate against the euro, which less competitive countries would retain.
The rump euro’s weakened exchange rate would lead to renewed economic growth, job creation, and a stronger tax base in southern European countries. Initially, to facilitate debt reduction, bondholders would face another haircut. Countries departing for the northern euro should make a one-time contribution to these debt-reduction efforts. A flexible membership system would enable countries to join the northern euro when their economic and fiscal conditions became strong enough.
Europe’s leaders must stop treating the eurozone as a homogeneous entity, imposing one-size-fits-all policies on vastly different countries. The euro’s framework should be adjusted to suit current fiscal and economic realities – not the other way around.
Copyright: Project Syndicate, 2013.
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