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 Everything needs to change, so everything can stay the same”

Giuseppe Tomasi di Lampedusa

 

Ten years after the insolvency of the Greek state triggered the crisis of the euro and the EU, it is time to look back and review the events and policy decisions that led to the eventual resolution of the crisis. Finding the right answer to the problems which had accumulated during the single currency’s first decade  of existence was diffi cult and time consuming.

 

For the fi rst fi ve years, from 2010 to 2015, the crisis deepened. The healing process could begin only when the crisis reached Germany in 2015. This eventually induced the German and French governments to abandon their piecemeal approaches to crisis management and to take radical steps for a comprehensive reform of the EU.

 

They convinced their partners that the structures of the EU and EMU, designed in the 20th century, had to be made fi t for the 21st century in order to preserve the European idea: a community of peoples united in freedom and democracy. Five years after this historical decision, we can conclude that the measures adopted have been successful. The eurozone and the EU now have a stable architecture, even if it is very different from that envisaged at the outset.

 

A false start

 

In the 1990s the single currency was designed essentially along the lines of the gold standard. An independent central bank was to pursue  price stability as its only goal, and governments were supposed to be fully responsible for their general economic and fiscal policies.

 

Even in financial difficulties they were not supposed to receive fi nancial help from the common central bank, other governments, or other EU institutions. This was, of course, a very demanding regime. Without recourse to the money printing press, governments would have to keep their fiscal houses in order.

 

Only with sound public fi nances could they expect to have continuing access to capital markets and to be able to roll over their debt. Moreover, participating economies had to be fl exible to adjust to country-specifi c shocks, and companies had to exercise strict controls over their costs to be able to compete in the common European and world markets. Exchange rate devaluations to correct for losses of competitiveness caused by a lack of cost control were supposed to be a thing of the past.

 

“The eurozone’s honeymoon came to an end with the bursting of the global credit bubble.”

 

A failed rescue

 

The eurozone’s honeymoon came to an end when the bursting of the global credit bubble ended the era of cheap credit. To prevent the single currency from falling apart, the European authorities quickly replaced private credit by official credit – partly through official loans to distressed countries by newly created euro area institutions such as the European Stability Mechanism (ESM), but even more so through the Eurosystem of central banks.

 

However, what was initially seen as temporary help for countries to return to the Maastricht requirements of sound public finances, economic flexibility and cost control soon turned into a seemingly permanent arrangement. Some countries were obviously not fi t for the nineteenth century-type gold standard that had been the blueprint. Electorates used to the amenities of the modern welfare state tended to expect more benefits than they collectively were willing to fund through taxes.

 

This made budget surpluses and the reduction of public debt impossible. The only way to fund the borrowing needs of governments was through the money printing press. As a result, the ECB was forced to provide financial backstops for both governments and banks, which had lent heavily to over-indebted governments. Over the course of 2013-14, the ECB bought securitised debt of companies in  southern European countries that neither risk-averse banks nor capital

market participants were prepared to buy.

 

“A eurozone ‘shadow state’ seemed to have emerged in early 2013 to run EMU.”

 

However, this set-up was soon rejected at national level. First, the Italian electorate ejected Mario Monti, who was regarded as a representative of the euro shadow state, from offiCe. Second, the Portugese constitutional court challenged its authority by declaring wage cuts for civil servants and benefit cuts for pensioners – essential demands in the adjustment programme to engineer an ‘internal devaluation’ – as incompatible with the country’s constitution.

 

Thus, for private financial transactions both the euro and the CeN would be legal tender, while for payments to and from CeN governments this status would be reserved for the CeN only. The central banks of the CeN countries would remain members of the Eurosystem of central banks, but they would not vote on the monetary policy decisions of the ECB.

 

However, they would be voting members of the new CeN central bank and manage the CeN currency with a view to keeping infl ation of the parallel currency low and to avoiding disruptive exchange rate movements of this currency against the euro. In practice, it was expected that the CeN central bank could achieve these objectives by managing a gradual appreciation of the CeN currency against the euro, in line with infl ation diff erentials between the Mediterranean and

CeN countries.

 

To avoid a disruptively brutal appreciation of the CeN against the euro, CeN countries could manage capital flows into their currency by taxing speculative investments. Although now members of different but (thanks to common cash money) overlapping monetary unions, France and Germany would continue to co-operate closely in the name of European unity  .

 

 

In this emerging European constellation, the European Union would effectively become an organisational wrapper for the unions within the union, and would cease to exert direct infl uence over the economic policies of its member-states. EU countries outside EMU would be given the choice of joining pre-in groups for the euro or the CeN, or of retaining their respective national currencies and becoming members of the European Union Free Trade Area (EUFTA). All in and pre-in countries of either the euro or the CeN currency area would adopt the euro as common cash.

 

“The EU ceased to exercise direct

influence over the economic policies

of member-states.”

 

http://www.lse.ac.uk/europeanInstitute/pdfs/CER-report-18.9.13.pdf

 

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