WHY THE EURO WILL NOT DISAPPEAR IN 2011 (and why all those speculations divert the attention from issues that really matter)
A. THE EURO WILL NOT DISAPPEAR
In Estonia, cash machines started providing euros on the first of January this year but this event went unreported as it is now fashionable to predict the failure of the euro.
It is an understatement to say that the euro area came under pressure last year. Yet, 2010 taught us, and German Chancellor Angela Merkel, that euro countries are bound together to such an extent that problems in one country will inevitably affect all the others. If Greece can no longer pay its debts, creditor banks will go bust and this means French, Dutch, Belgian and particularly German banks. If German banks get into trouble, the savings of the German population will evaporate. Germany will never let this happen and therefore the taxpayer will bail out the banks. Moreover, the collapse of a bank can have a domino effect that results in considerable collateral damage. The fall of Lehman Brothers, in 2008, underlines this. In other words, Greek bankruptcy has never been an option. As a result, 2010 witnessed the hurried creation of an emergency fund as euro countries made financial resources available. Germany, being the biggest and strongest of the euro countries took the lead. In theory, Greece will pay back the loan but in fact we cannot be certain of this and the bail out carries a risk. Maintaining the euro has its price but so too has abandoning the euro, especially from an economic, political and psychological perspective.
In the nineteenth and early twentieth centuries, currency unions dissolved, but this never involved unions as strongly integrated as the present euro area. In 2002, the Argentine peso/US dollar parity link was broken but this cannot be compared with the break up of the euro zone.Argentina was not part of a common market like the euro area, which binds countries together economically. In addition, the peso was a separate currency. A decision to throw the Greeks, the Irish and other countries in trouble out of the euro zone would just result in misery. In any case such an operation would require practical preparation. New money would have to be minted, computers reprogrammed, shopping trolleys and vending machines adapted. This would take time. Meanwhile, would any Irish citizen leave his euros untouched in the bank and wait calmly until they were automatically converted into a new and, by definition, inferior currency? The intention of such an operation would indeed be to devalue the new currency against the euro. Any preparations to remove Ireland from the euro area therefore would start a run on the Irish banks. Anyone fearing removal from the euro area would transfer his euros to a safe foreign bank, in Germany for instance. Or, if need be, hide them in a sock under his mattress. It is unlikely anyone would calmly wait and see. If you want to witness a rush on a bank, this would be the moment. No Greek or Irish bank could survive this. As soon as there is any real possibility of the euro area disintegrating, companies and individuals in risk countries would shift their money to safer countries before it was converted into a new, inferior currency. This could happen in Spain, Portugal, Italy and maybe also in France and Belgium. We have already mentioned the domino effect. What has happened to Irish banks has ramifications for all the Member States. If banks go bust in one country, they will drag down banks in other countries and this would eventually affect Germany. In other words, a run on a bank would result in total chaos. The Germans recognise this and that is why it will not happen.
The Germans therefore must pay the most to save the euro. They would also pay the highest price for abandoning the euro. To (mis)quote Gary Lineker: European integration is a simple game with 27 countries and at the end, the Germans lose. The reality is somewhat more complicated. Germany obviously gains if the euro is maintained as it will keep its easy access to the markets of France, Italy and Spain. Without the euro, local currencies would be of lower value, which would be a serious handicap for German exports as their products would suddenly become more expensive. This paper will now examine other, more nuanced, factors.
B. POLITICAL SCIENTISTS VS ECONOMISTS: PROFESSIONAL DIFFERENCES
Many economists would say that breaking up the euro area would help the periphery countries as they would be able to devalue their new currencies and boost their exports. Combined with strong domestic savings this would provide a welcome breathing space.
A political scientist taking account of other elements in the debate, however, will conclude that the decision to abandon the euro will ultimately be a political one that will have to be made with the quasi common consent of the Member States.This is simply not an option.
It is not uncommon for economists to consider politics an annoying obstacle. It might also be true that politicians make decisions that are unwise from an economic or other point of view. But ultimately they do make decisions and the effect of political drive should never be underestimated. A year ago, with the outbreak of the Greek crisis, several clever economists unanimously agreed that it would be very unwise to create an emergency fund. Legal experts added that it would be prohibited under the treaty. For all kinds of reasons, however, there was a political will to create such a fund and this was enough to make it happen. This political will was not immediately obvious as Germany was against it. The moment Chancellor Merkel concluded that the price of Greek bankruptcy for Germany would be higher than the one for an emergency fund, she changed tactics. The process gained momentum and the treaties are now being adjusted to provide the appropriate framework.
In the early nineties the political commitment to introduce a single currency panicked the stock markets. Not only the British pound but also the Italian lira lost value. Economists rushed to declare that practice had demonstrated that introducing the single currency would not only be unwise but also unrealistic as there was no ‘optimum currency area’. Economists may have many qualities, but their skill at predicting the future shrinks as politics comes into play. The euro had become inevitable and the southern countries were allowed to join in. There was a political consensus and the path had been mapped out. Going back on former agreements is more difficult and more expensive than going forward, even if the path is more confusing than was initially expected. Agreements were therefore gradually adjusted, without loosening the original commitment. The Maastricht criteria for the introduction of the euro were interpreted in a very flexible manner. In the nineties, the air buzzed with rumours that statistics were being manipulated. Politicians did not care. Rightly or wrongly, it no longer matters. Those, who maintain that the Greeks or Italians have swindled us have a rather short memory.
In the area of European integration there were only modest (and in some cases very small) steps forward. The predominant trend is increasingly close cooperation. European integration is a one-way process and the Union never goes back on this. In the fifties there was the ambitious idea to build a European Economic Community, an EEC. First, a free trade area was created, causing border barriers to disappear. The second step was the customs union to create a single trade policy. The next initiative was the internal market with the more or less free movement of goods, persons and services to deal with hidden barriers. In this process, other cross-border problems were regulated by European law. All these issues were interrelated and more and more areas were drawn into the integration web. The possibility of introducing a single currency had been explored since the late sixties to avoid, among other things, that countries gained economic advantage with strategic devaluations. Today, we blame the Chinese for keeping their currency artificially low to boost their exports but it is not so long ago that European countries did exactly the same thing. Meanwhile we have a single currency in seventeen countries.
Some countries like the UK stay out (for now?) but this does not mean that countries having introduced the euro can do away with it. Once a currency is interwoven into a community it cannot be taken away without unravelling the entire internal market.The euro crisis is a crisis of European integration as a whole. A fact stated by Angela Merkel and confirmed by Herman Van Rompuy, although one day later he denied his intention of saying such a thing. The denial, however, was unnecessary: he was right.
The integration process has its internal dynamics – history has proved this – but it can be temporarily slowed down, or in a way be ‘channeled’, but it will keep moving inexorably forward. This internal dynamic is the search for a stronger Europe. The political mainstream in Europe is for more Europe and the political logic of the European Union is still more powerful than economic or legal arguments.
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Hendrik Vos (Mechelen, 1972) studied Political Sciences at Ghent University where he became a professor at the Department of Political Sciences in 1999. He is currently professor and director of the Centre for EU-Studies. His research specialises in decision-making and current developments in the European Union. He has published many books and contributions in renowned professional journals and regularly takes part in international conferences. Hendrik Vos is a much asked commentator on EU affairs in newspapers and on radio and television.
Ferdi De Ville (Ninove, 1985) studied Political Sciences at GhentUniversity. He is currently a researcher at the Centre for EU-Studies of the Department of Political Sciences of his Alma Mater and research fellow at the Flemish Centre for International Policy.
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