If the euro fails, the whole EU could burst apart. But who could stop this from happening and how?
It’s a brave project – Ben Bernanke, the current Chairman of the US Federal Reserve once said about the eurozone, in the sense that common monetary policy should imply shared fiscal policy. Indeed, the euro area is not in line in its actual existence with the criteria of “optimal currency areas” that was designed by Robert Mundell, an American economist in the 1960s.
Some other economists and analysts in the United States are even more skeptical than Bernanke about Europe. Some months ago, in the days of the European Union-IMF bailout package for Greece, US news magazine Newsweek published a cover story with the title “The Euro is over.” No question mark, no doubts. In the article, well-known Harvard economists argue against the viability of the euro. For them, the common currency is simply a strait-jacket if it is not paired with true economic coordination.
But that is not a new phenomenon; the Americans (Anglo-Saxons) have been pessimistic on the euro project long before the current financial crisis. The late Milton Friedman, the “founding father” of the monetarist economic approach, never denied his antipathy towards the euro. He said in 1999, before the introduction of the common currency, that the euro would not survive the first economic crisis. Well, it is still alive, although struggling . . . Another economic icon, Nobel Prize-winner Paul Krugman, who is of more Keynesian tendencies, writes about the euro as an “originally bad idea.” In light of these opinions, Bernanke’s words about the braveness of the project seem to be an understatement.
What the American economists often ignore is that euro is not only – in my opinion, not even primarily – an economic project, but also, maybe even primarily, a political one. Politics tries to repair the economy and if it is necessary, the vision and the political interests try to overwrite pure economic reality.
Nowadays, seemingly there is no significant political will in Europe to give up the brave project. In Davos, where the world’s financial and political elite gathers once a year in January, a few days ago Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, expressed their shared views that the euro is “more than a currency.” If the euro fails, Europe fails, they added, which is pretty much unthinkable . . .
But economists and analysts in Europe do think about the falling apart of the common currency area in consequence of the sovereign debt crisis in a number of peripheral euro area countries. For example, there has been a long-lasting debate whether Greece should be allowed to go bankrupt as soon as possible, or if this scenario should be averted, as it would domino into a series of state defaults in the periphery of the eurozone. Who will pay the bill and when? Will Germany once again save the boat at any price, or will it let it sink, along with the money it has invested in it?
The brave project faces one of its largest challenges ever. But as many times in the history of the European Union, a crisis could serve to deepen the EU. The economic reregulation of Europe, known as economic governance, will transform the EU more deeply than anything since the Maastricht Treaty. It implies better coordination and supervision of fiscal policies and financial imbalances, and the promotion of competitiveness through new rules. Moreover, the new “competitiveness pact” of Merkel and Sarkozy that was presented at the European Summit in early February would extend the scope of economic coordination among eurozone countries to areas such as tax policy and the pension system.
We live in turbulent times and the financial crisis is making decision-makers rethink some former paradigms. Taboos are falling. Just one example: who would have thought three or four years ago that Ireland with its “miraculous” economy would become one of the most vulnerable countries in Europe?
The brunt of the work of reregulating the EU falls within the period of Hungary’s EU Presidency. The role of Hungary is not “to lead” the EU or “to protect national interests” – this would be against the spirit and wording of the Treaties –, but to act as an “honest broker.” The Hungarian EU diplomacy has an important mediating, coordinating and organizing role to work out compromises among member states and European institutions on a number of economic issues, such as economic governance. The stakes are high – it is boom or bust for the euro and the EU.
What doesn’t kill you makes you stronger, Friedrich Nietzsche, the German philosopher once wrote. Something similar often happens with the EU. This time, the survival tour is not yet over.
József Péter Martin, the editor of BBJ's EuroClick, is an economist and journalist.