Twenty years on, what is euro’s fu­ture?

Gover­nance and dif­fer­ent growth rates in the bloc are the com­mon cur­rency’s big­gest chal­lenges

Kathimerini English - - Focus - BY COSTAS SIMITIS *

ANAL­Y­SIS The euro turned 20 years old on Jan­uary 1, 2019. On Jan­uary 1, 1999, after years of prepa­ra­tions, 11 mem­ber-states of the Euro­pean Union agreed to use the same cur­rency in all mon­e­tary trans­ac­tions among them­selves, an ini­tia­tive that marked the of­fi­cial launch of the euro. The euro’s in­tro­duc­tion in phys­i­cal form, as coins and ban­knotes, how­ever, took place on Jan­uary 1, 2002. The euro was broadly ac­cepted as a uni­fy­ing in­sti­tu­tion and an­other eight mem­bers joined the club in the years that fol­lowed.

Greece en­tered the Ex­change Rate Mech­a­nism (ERM) on March 14, 1998, and the Eco­nomic and Mon­e­tary Union (EMU) on Jan­uary 1, 2001. Those op­posed to the de­ci­sion to join the euro area ar­gued that Greece would no longer be able to con­trol its fis­cal pol­icy. But Greece was not, and is not, like Swe­den and Den­mark, which did not adopt the euro. It was not a coun­try with a stable cur­rency and a stable econ­omy. With a per­sis­tent trade deficit, a short­age of nat­u­ral re­sources – oil in par­tic­u­lar – mas­sive debt and con­stant bor­row­ing, Greece was al­ready wholly de­pen­dent on in­ter­na­tional eco­nomic devel­op­ments. Suc­ces­sive de­val­u­a­tions of the drachma, the dif­fi­culty of bor­row­ing and high in­ter­est rates are proof enough of this – and all signs of weak­ness.

De­spite ef­forts to sta­bi­lize the econ­omy, Greece’s pub­lic debt to­day is more than 175 per­cent of gross do­mes­tic prod­uct (GDP) – a Euro­pean record.

Greece’s in­duc­tion into the EMU had a marked ef­fect on the in­ter­est it paid on loans, slash­ing it dra­mat­i­cally. Among other ad­van­tages, this helped us save sig­nif­i­cant amounts. Dur­ing the 1990s Greece spent about a third of its tax rev­enues on in­ter­est pay­ments; by the end of 2003, this had fallen to less than a quar­ter of rev­enues, giv­ing Greece much more scope to in­vest in ed­u­ca­tion, health and wel­fare.

In the 20 years since the euro was first in­tro­duced, the EMU has faced sig­nif­i­cant chal­lenges. The 2008 eco­nomic cri­sis, for ex­am­ple, re­sulted in Greece, Por­tu­gal, Ire­land and Cyprus find­ing them­selves un­able to abide by the rules, forc­ing the EMU to take ac­tion so that these states would be able to meet their com­mit­ments as mem­bers of the euro area. This process re­sulted in mech­a­nisms that safe­guard the op­er­a­tion of the sys­tem. The Euro­pean Sta­bil­ity Mech­a­nism (ESM) is one ex­am­ple.

How­ever, the 2008 cri­sis, which lasted about four years, gave rise to skep­ti­cism re­gard­ing the mer­its of the euro. Even in ad­vanced Euro­pean coun­tries like Italy we hear the ar­gu­ment that the euro is the cause of their eco­nomic woes. Pop­ulist par­ties main­tain that it ties gov­ern­ments’ hands to such a de­gree that they can­not im­ple­ment the nec­es­sary re­forms. In Greece, the SYRIZA-In­de­pen­dent Greeks coali­tion saw the euro as the cause of the Greek cri­sis and sup­ported the coun­try’s de­par­ture from the cur­rency bloc in early 2015. As we know, it ex­e­cuted a neat 180-de­gree turn and adopted the rules of the euro­zone.

Such neg­a­tive views of the euro are not shared by the ma­jor­ity of Euro­pean cit­i­zens, how­ever. Pub­lic opin­ion polls car­ried out by the Euro­pean Com­mis­sion show that most cit­i­zens be­lieve in Euro­pean co­op­er­a­tion and the ben­e­fits of the euro.

But let us put Europe aside for now and re­mem­ber what life was like in Greece be­fore the euro – the prob­lems of travel, of study­ing abroad and par­tic­u­larly of car­ry­ing out any trans­ac­tions in for­eign coun­tries, or the fact that the term for­eign ex­change meant mea­sures, per­mits, hard work and red tape. We were re­minded of those days re­cently by the cap­i­tal con­trols that put a cap on de­posit with­drawals and added strings to all money trans­fers abroad. Let us also cast our minds back to the tur­bu­lence caused by the de­val­u­a­tions of the drachma in 1983, 1985 and 2001. Greece never had a cur­rency that was as stable as the euro.

The euro also cre­ated some big prob­lems, of course. Most re­cently, for ex­am­ple, we have seen pop­u­lar re­ac­tion to fis­cal sta­bil­ity mea­sures in France from the Gilets Jaunes move­ment. Then there is the fact that not all mem­ber-states grow at the same rate. Ger­many in­creased the dis­tance sep­a­rat­ing it from oth­ers by in­creas­ing its GDP faster, on the back of su­pe­rior in­dus­trial out­put and ex­ports.

In an ar­ti­cle on the euro’s 20th an­niver­sary, French news­pa­per Le Monde spoke of a “frag­ile” cur­rency. Italy, mean­while, is hav­ing trou­ble stick­ing to the rule that its bud­get deficit can­not sur­pass 3 per­cent of GDP. Spain, Por­tu­gal and Greece, which ex­pe­ri­enced dif­fer­ent lev­els of cri­sis, have not yet re­turned to a smooth and stable growth path. Among the cri­sis coun­tries, only Ire­land has suc­ceeded in nor­mal­iz­ing its econ­omy.

The econ­omy of each coun­try has cer­tainly played a part, but it is not the only fac­tor. In the 2003-05 pe­riod un­der Ger­hard Schroeder, Ger­many im­ple­mented strict mea­sures for re­duc­ing pub­lic spend­ing and la­bor costs, as well as for sta­bi­liz­ing the econ­omy un­der the Agenda 2010 ini­tia­tive. Other coun­tries – and Greece is fore­most among them – dis­re­garded the course of their econ­omy. Greek gov­ern­ments ig­nored the rules and in­creased their spend­ing be­yond ac­cept­able lim­its. In 2009, be­cause of poli­cies im­ple­mented by the New Democ­racy gov­ern­ment at the time, the bud­get deficit reached 15.4 per­cent of GDP.

The cause and re­sult of these devel­op­ments was the fact that the EMU has been un­able to ef­fec­tively deal with the prob­lem of growth dis­par­ity in Europe. The com­mon cur­rency does not suf­fice on its own to en­sure that all mem­ber-states have equal op­por­tu­nity to en­joy the op­por­tu­ni­ties and pos­si­bil­i­ties it of­fers. The cur­rent con­di­tions fa­vor the eco­nomic dom­i­nance of the most pow­er­ful, with the weaker mem­bers slip­ping ever fur­ther be­hind, es­pe­cially if un­der an in­com­pe­tent gov­ern­ment.

The EMU will con­tinue to work to­ward im­prov­ing its ef­fi­cacy, and a bank­ing union is seen on the hori­zon. Yet there ap­pears to be some hes­i­ta­tion over the much-needed steps ahead. The De­cem­ber 2018 Eurogroup sum­mit, for ex­am­ple, lim­ited it­self to a state­ment about the need for new and pow­er­ful mech­a­nisms for prevent­ing and manag­ing eco­nomic crises, as well as for the “sig­nif­i­cant strength­en­ing” of the mon­e­tary union.

Euro­pean uni­fi­ca­tion with­out a com­mon cur­rency is not pos­si­ble in the age of glob­al­iza­tion and the euro has al­ready proven it­self to be the most pow­er­ful tool of uni­fi­ca­tion we have. What is at is­sue, in­stead, is a new modus operandi for the Union. There are no easy an­swers.

There are two main is­sues that need to be ad­dressed. The first – which has been the sub­ject of ex­ten­sive dis­cus­sions and pro­pos­als – con­cerns the way the EMU is gov­erned. The ti­tle used to de­scribe this is “eco­nomic gover­nance.”

The sec­ond con­cerns how we deal with the union’s struc­tural im­bal­ances so that it can work to the greater ben­e­fit of the weaker mem­bers by dis­tribut­ing pros­per­ity more equally among its dif­fer­ent ar­eas. This does not have a ti­tle and has not gen­er­ated such wide­spread in­ter­est as the first is­sue, but it could, per­haps, be de­scribed as “in­duc­tion and par­tic­i­pa­tion.”

The Euro­pean Union is nei­ther a club where only the elites have a say, nor a fed­er­a­tion of states that op­er­ate on the or­ders of a cen­tral, supreme au­thor­ity. It is a joint project aimed at pro­mot­ing free­dom, growth and adap­ta­tion to a chang­ing in­ter­na­tional en­vi­ron­ment. * Costas Simitis was prime min­is­ter of Greece in 1996-2004.

Greece has never had a cur­rency as stable as the euro. Read­ers may re­call that the 1983, 1985 and 2001 de­val­u­a­tions of the drachma caused great tur­bu­lence.

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