The Euro and Nobel Peace Prize
The award, two weeks ago, of the Nobel Peace Prize to the European Union may have seemed awkward to those banks and risk consulting firms in London and New York who have bet for a decade on the likely death of the Euro currency.
When it was created in 1999, Euro was supposed to bring back monetary stability in Europe and put an end to competitive devaluations from countries like Spain or Italy. Ten years later, it appears that the monetary union, actually, worked rather well, as the 17-members Eurozone yearly average inflation rate of no more than 2% would notably testify. Yet, the monetary union was supposed to go together with an economic union, which notably meant a better unified fiscal and budgetary policy, converging rates of interest and narrowing competitive production costs between the members.
As a whole, the Eurozone results compare favorably with others. Is it necessary to remind that the public deficit of Eurozone member-states represents 3.3% of their GDP, versus 8.7% in the US? Or that external trade surplus is equivalent of 1.1% of their GDP, versus minus 3.1% in the US? The difficulty, however, stems from the fact that the Eurozone is not a national entity, and continuing competitive cost discrepancies between the members have contributed to widen the gap in terms of economic stagnation, unemployment and respective borrowing rates between northern and southern Europe.
At the same time, Europe was hit by a terrible financial crisis provoked by a US real estate crash, itself originating from criminal lending policies pursued by unscrupulous bankers with the blessing of the US Administration. The moneys European governments had to inject into their own contaminated banking system could have obviously been used more usefully elsewhere. Necessary borrowings increased the level of public debts, whereas a growing credit squeeze achieved to jeopardize any prospect for a much-needed growth.
In front of such urgency, Eurozone actors reacted in a disorderly manner but in the end, a rather practical and efficient one. First, the European Central Bank agreed to buy unlimited quantities of bonds of any troubled member state, provided it accepts the conditions of a bailout program. Second, a European Stability Mechanism was implemented, with a power strength of €500 billion. Third, a European Banking Union supervision mechanism, which was agreed in principle in last June, was eventually concretized last week and will become effective in 2013. Spain, supported by Italy and France, would have preferred it to be implemented earlier. Germany, on the contrary, was able to stick to its calendar; but it finally agreed that all banks be concerned – including its regional banks it wanted first to take out of the mechanism. As always happens in Europe, agreements are based upon mutual concessions.
More importantly, Eurozone members have finally convinced the markets that Euro is an integral part of the European construction; its collapse would mean the collapse of the Union itself – which is of no interest to anyone, especially Germany and France the cumulated GDP of which represents more than 50% of the global Eurozone GDP. Incidentally, one should always remind of fundamentals when comparing euro to dollar: Eurozone inhabitants are 320 million; its GDP represents 75% of the US one and its share of the world trade finance amounts to 25%. Looking at what some Republican officials have in mind with respect to the handling of the US public debt – the so-called General Motors accordion squeeze, one may wonder where the risk higher is.
Meanwhile, economic efforts in the Eurozone should obviously continue. Recent laws passed in Spain, Italy or France is a clear signal of unprecedented moves which cannot but come to fruition. It is also true that a monetary and economic union requires a closer fiscal and political union, whatever the difficulty to move fast on such sensible issues marked by millenniums of history. Yet, some results such as the obligation for a Eurozone member state to submit its preliminary budget to the European Commission and to its peer, are being registered and will be pursued.
Germany would like to see many of them, when France would better prefer the onus to be put more on solidarity and growth. As recommended for instance by the IMF, a move by the Netherlands or Germany towards fiscal easing and wages rises would contribute to stimulate their economies and better balance trade exchanges within the Eurozone (a mere 3% to 4% hike was considered sufficient by the IMF). Greece or Spain would obviously take advantage of it as they can hardly do more than what has already been required of them, whereas everyone knows that the German trade surplus may have future serious adverse effects at home. It is probably where solidarity also comes in.