This year will be crucial for survival of the euro
I HAD never heard of them. The Five Presidents are the leaders of the European Union’s Parliament, Commission and Council, the euro countries and the European Central Bank (ECB).
In mid-2015, they published a report about economic and monetary union (EMU), the project for which the single currency is the poster child.
In their judgment, “EMU today is like a house that was built over decades but only partially finished.”
Completing the job, they argued, will require establishing full economic, financial, fiscal and political unions, which they reckoned would take a decade.
Whatever chance there was of completing EMU 18 months ago has been diminished by the advance of Eurosceptic parties. With European elections aplenty in 2017, the next 12 months will be crucial to the durability of EMU.
Of course, little of this is new. In 1997, two years before the euro was born, Milton Friedman wrote that, “Europe exemplifies a situation unfavourable to a common currency. It is composed of separate nations, speaking different languages, with different customs, and having citizens feeling far greater loyalty and attachment to their own country than to a common market or the idea of Europe.”
Other objections included limited labour mobility within Europe and the absence of a mechanism to shift resources from better-off to worse-off regions. Without these features, when a shock hits one part of the monetary union its only way to regain competitiveness is through cutting wages and prices, as Greece, Ireland and others can testify.
As long ago as 1999, anticipating problems that EMU might encounter, Michael Bordo and Lars Jonung argued that one factor could trump these design flaws, making EMU sustainable. “Political union is the glue that holds a monetary union together,” they concluded. For them, central co-ordination of tax and spending policies was an indispensable part of political union.
The Five Presidents agree. Until now, members of the euro have agreed to abide by rules that aim to limit deficits and debts. These rules have been insufficient both because they have frequently been breached and because they do not provide the fiscal transfer mechanism a currency union needs. The answer, according to the Five Presidents, is a system of, “sovereignty sharing within common institutions... that would require... joint decision-making on elements of [countries’] national budgets.” In other words, a formal fiscal and political union.
Is the technocratic solution for delivering a stable and sustainable Euro politically feasible? At least three countries that use the euro hold elections in 2017 – France, Germany and Netherlands – with polls possible in Austria and Italy.
Eurosceptic parties have gained ground in each of them and propose referendums on either EU or euro membership. It is possible that none of them will reach government. However, as the UK learned, Ukip did not need to be in power to wield influence and secure its goal. It might be a long-shot that core euro members will vote to exit the currency union, but the rise of outsider parties makes it more difficult to implement the reforms the Five Presidents recognised are essential to its sustainability.
Two outcomes are possible. In theory, the currency union could dissolve. However, the Maastricht Treaty makes no provision for countries to leave. It has no Article 50. Unlike when the Latin Monetary Union of Belgium, France, Italy and Switzerland ended, the members of the euro long ago ceded the ability to create their own money to the ECB.
Any hint that a country might try to do so would lead to bank runs as savers sought to get their hands on euros rather than receive replacements.
More likely is a prolonged period of muddling along. Kicking a can down a road can be productive if the time is used to take the right actions. But the politics of Europe makes creating the fiscal and political glue that the Five Presidents seek very difficult. That means living with instability and uncertainty in the euro area well beyond the decade they envisaged, and with it continued slow growth. That matters to the UK because the euro area remains our principal export market.
That is why 2017 is a crucial year for the future of the euro. Can Europe’s elites convince its peoples that closer union is necessary to complete the single currency? Or will they fail, condemning Europe to more years of sluggish and volatile economic performance? Stephen Boyle is chief economist at Royal Bank of Scotland.
‘‘ The politics of Europe makes creating the fiscal and political glue that the Five Presidents seek very difficult