Sus­tain­ing the un­sus­tain­able Eu­ro­zone

Financial Mirror (Cyprus) - - FRONT PAGE -

When the eu­ro­zone was es­tab­lished, its cre­ators en­vi­sioned grad­ual progress to­ward an “op­ti­mal cur­rency area,” characterised by fis­cal in­te­gra­tion, the free move­ment of labour, and po­lit­i­cal union. But this process has not oc­curred, and, as the in­ter­minable Greek cri­sis has shown, the eu­ro­zone re­mains rife with struc­tural weak­nesses and ex­tremely vul­ner­a­ble to in­ter­nal shocks. This is clearly not sus­tain­able.

De­spite ef­forts to pro­mote fis­cal-pol­icy co­or­di­na­tion, eu­ro­zone mem­bers’ bud­gets still fall un­der the purview of sep­a­rate na­tional au­thor­i­ties, and north­ern Euro­peans con­tinue to op­pose trans­fers from more to less pros­per­ous coun­tries be­yond the very limited al­lowance of the Euro­pean Union’s re­gional funds. More­over, labour mo­bil­ity is se­verely con­strained by lin­guis­tic and cul­tural bar­ri­ers, as well as ad­min­is­tra­tive bot­tle­necks. And “ever-closer” po­lit­i­cal union has ceased to at­tract public sup­port – if it ever did – and is thus not fea­si­ble to­day.

A grow­ing num­ber of com­men­ta­tors – and no longer only in the An­glo-Saxon world – ques­tion the mon­e­tary union’s viability. Some en­cour­age Greece to exit the eu­ro­zone, be­liev­ing that a more re­stricted and ho­mo­ge­neous cur­rency union would be stronger and eas­ier to unite. Oth­ers con­sider a Greek exit to be just the start of the in­evitable un­rav­el­ing of a scheme that does not serve the pur­pose for which it was cre­ated.

The eu­ro­zone has so far man­aged to prove the doom­say­ers wrong. By sheer force of po­lit­i­cal will, com­pro­mise af­ter com­pro­mise has been reached, thereby sus­tain­ing a his­toric project that is not, in its cur­rent state, sus­tain­able.

The need to main­tain this com­mit­ment to Euro­pean unity, and over­come the eco­nomic dif­fi­cul­ties that arise, is re­in­forced by new geopo­lit­i­cal chal­lenges. Most no­tably, Rus­sia’s per­ceived am­bi­tion of re­cap­tur­ing its Soviet-era in­flu­ence is chal­leng­ing the rules-based or­der that was es­tab­lished af­ter World War II, and a surge in re­li­gious and po­lit­i­cal ex­trem­ism is threat­en­ing demo­cratic and lib­eral val­ues.

But the eco­nomic dif­fi­cul­ties are bound to con­tinue, fos­ter­ing doubts about the cur­rency union’s fu­ture – doubts that could be­come self-ful­fill­ing by un­der­min­ing the euro’s abil­ity to func­tion prop­erly. Al­ready, eco­nomic pres­sures have fu­eled an­tiEuro­pean sen­ti­ment in Spain, Italy, and even France; if al­lowed to con­tinue, such sen­ti­ment could cul­mi­nate in se­ces­sion, with dev­as­tat­ing con­se­quences for the eu­ro­zone and Europe as a whole.

The first step in such a process would prob­a­bly be the eu­ro­zone’s di­vi­sion into sub­ar­eas, com­pris­ing coun­tries of rel­a­tively equal re­silience. As it be­comes in­creas­ingly dif­fi­cult to pur­sue co­her­ent fis­cal and mon­e­tary poli­cies, the risk of the eu­ro­zone’s com­plete dis­so­lu­tion would grow. Greece’s exit could shorten this timeline con­sid­er­ably.

Though such a sce­nario was in­con­ceiv­able five years ago, when the Greek cri­sis first erupted, the term “Grexit” en­tered the Euro­pean lex­i­con soon af­ter, when the cri­sis reached a new peak. But Euro­pean lead­ers seemed to rec­og­nize the im­pli­ca­tions of al­low­ing a coun­try – even small, cri­sis­stricken Greece – to exit the eu­ro­zone. That is why, this year, a se­ries of Eu­rogroup meet­ings were held with the avowed pur­pose of avert­ing such an out­come.

The prob­lem is that Euro­peans have be­come so ac­cus­tomed to mud­dling through that long-term so­lu­tions seem all but im­pos­si­ble. In­deed, in re­cent years, eu­ro­zone au­thor­i­ties have in­tro­duced sev­eral poli­cies for fight­ing fi­nan­cial crises – in­clud­ing gov­ern­ment-backed res­cue funds, a par­tial bank­ing union, tougher fis­cal con­trols, and a role for the Euro­pean Cen­tral Bank as lender of last re­sort. But most of th­ese poli­cies – with the pos­si­ble ex­cep­tion of the bank­ing union – are aimed at man­ag­ing de­fault risk, not elim­i­nat­ing this risk’s root causes.

It is time to re­cover the ca­pac­ity, dis­played by the EU’s founders, to look ahead and pur­sue a dream of a bet­ter fu­ture. Specif­i­cally, eu­ro­zone lead­ers must in­tro­duce a mech­a­nism for fis­cal trans­fers from stronger to weaker economies.

In a cur­rency union, in­di­vid­ual economies can­not al­ter their ex­change rates to ac­count for changes in rel­a­tive com­pet­i­tive­ness. The re­sult­ing price stick­i­ness tends to de­lay macroe­co­nomic sta­bil­i­sa­tion and struc­tural ad­just­ment, lead­ing to ris­ing debt and un­em­ploy­ment in weaker economies. With­out free labour mo­bil­ity, fis­cal trans­fers are the eu­ro­zone’s only op­tion to ease debt re­pay­ment and, by stim­u­lat­ing eco­nomic ac­tiv­ity, boost em­ploy­ment.

Es­tab­lish­ing such a mech­a­nism will not be easy, as it re­quires a re­source that is in short sup­ply in Europe to­day: trust. In­deed, the north and south have strug­gled to over­come cul­tural dif­fer­ences and un­equal eco­nomic con­di­tions, pre­vent­ing them from view­ing the sit­u­a­tion from each other’s per­spec­tive.

Bind­ing the union closer to­gether could prove crit­i­cal to build­ing such trust. One strat­egy that com­bines ra­tio­nal­ity with the grad­u­al­ism needed to over­come po­lit­i­cal re­sis­tance would be to in­crease the EU bud­get steadily, so that it can ul­ti­mately play a macroe­co­nomic role, pro­mot­ing sta­bil­ity and re­in­forc­ing co­he­sion within the eu­ro­zone.

It is a tough sell, but also a vi­tal one.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.