In The Zone, or Zone Out?

Why does the euro survive its obvious disabilities?

In zone

The Economist (TE), always a reliable supporter of the EU (perhaps because its focus is primarily economics) has an article in last week’s edition, which tells us why the Eurozone (EZ) will survive almost any shock (“Why the euro always survives until tomorrow”). We don’t agree, of course.

( https://www.economist.com/node/21784561?frsc=dg%7Ce )

The article opens with a reminder that in the global financial crisis of 2008-2009 there was an unusual demand for banknotes as people believed that their money was safer in cash than invested in more usual places.

“…in troubled times people look to strong states for security. “Europe” doesn’t cut it.” By “Europe” the author means the European Union. In the current covid-19 pandemic crisis national priorities are reasserting themselves and whenever “that happens, a bout of anxiety about the euro can’t be far off….the burden-sharing that would strengthen the euro always seems too big a step. Low-debt countries, notably Germany, do not fully trust high-debt ones, such as Italy, to play fair.” We’ve seen a good deal of this in recent weeks, with stronger economies of the north unwilling to, as they see it, carry the risk of southern default [1].

Eurosceptics believe the lack of a fiscal centre will tear the currency zone apart. This downplays the pull of a monetary union…. The euro is a lot more durable than it sometimes looks.”

Eurozone-6It’s true that it’s very difficult to break up the eurozone and that the ECB has acted creatively, way beyond the rules. Then again the EZ has only ‘weathered’ one previous, severe crisis so far but hasn’t solved anything from that; it assumed a huge pile of shared debt but hasn’t tackled it, so this bigger problem sits on top of the last with essentially the same tools available. The European Stability Mechanism imposes a sentence, not a solution, and the sentenced can see that their term will be indefinite, they don’t have tough but achievable goals to buy their freedom. Meanwhile the warders this time are not sitting on surpluses themselves. The longer this festers the weaker the EU becomes [2] and [3].

The rouble zone unravelled suddenly and fast, it will take only one large country to rebel to crash the EZ and the Union [4]. It is possible that the whole structure will drift into insignificance but it’s more likely to destruct, the will of the people has not been tested to the extent now in prospect.

History says that political union is the essential glue of any currency union. This invariably entails a centralised system of taxation and public spending.” In fact the history of the Rouble Zone tells us that even with political union and a “centralised system of taxation and public spending” a common currency is insecure. And that assumes—which we cannot—that the EU can bring ever closer union to such a pitch.

A country with its own money could in principle absorb such shocks through a weaker currency or with a monetary policy tailored to its needs. This is not possible in a currency union.” Which is why the EZ experiences regular and severe crises.

But the euro itself is not obviously doomed. Indeed it is not too fanciful to imagine a future in which it survives even if the EU loses its sway.” This is wishful thinking; “if the EU loses its sway” over its member states then governments of the member states will recover the right—and the responsibility—to put their own interests first, which will surely require them to ditch the common currency. Fanciful thinking doesn’t trump political reality. “The sight of politicians squabbling over who should bear the budgetary cost of coronavirus is not a great advertisement for Europe” (i.e.the EU).

[GermanyYour Friend]The safest option is probably to engineer a split, which might be creatively presented as a solution that maintains the goals and ‘values’ of the original project. There is nothing to suggest that the countries can either converge or stabilise their relative positions within the EZ so it surely must sink. Presumably lifeboats will be built and launched to gather pockets of survivors. We don’t suppose Germany will invade Italy to take what they believe is theirs.

The last word from The Economist, whether hopeful, as they see it, or hopeless, as we see it, is that: “For all the bickering, the euro zone has become good at lasting another day. It never quite does enough to resolve all its contradictions. But they have never quite proved fatal.”

Eurozone-7The idea that the euro always survives so it will again is rather silly. The euro hasn’t been tested to the degree it faces now and by continuing to delay a stable resolution to its intrinsic faults the pressure has built—is that sustainable? (See our earlier post on the subject, from December 2017 [5].)

[1] Eurozone Bail-out Agreed

[2] The Death of the Euro

[3] Money Makes The Euro Go Aground

[4] Die Another Day?

[5] Zone In or Zone Out?


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