The battle to save the euro is still being fought. But the intellectual battle for the merits of monetary union has been conceded without a shot being fired in its defence. The euro’s real tragedy is that it has been disowned by its own kin.
It is now a badge of pragmatism to argue that dissolving the monetary union is the best way forward. What do the euro’s defenders respond? That if the euro fails, Europe fails. That letting the euro disintegrate would do more harm than good.
This is both true and important. But to say that we must stick with the euro now that we have come this far, or else all hell will break loose, is to admit that it would be better not to have set out on this route to begin with. When the heirs to the founders of monetary union defend it as making lemonade from lemons, they elevate to intellectual dominance the view that the euro caused the crisis.
This view comes in three tenses – past, present, future. Past: it was an ill-conceived project of monetary union that got Europe into a mess. Present: the euro rules out the best solutions to its current problems. Future: some members’ prosperity depends on abandoning the euro in favour of national currencies that they can and should devalue.
All three are mistakes.
We are told that euro members could accumulate unrepayable public debts because of an inappropriate common interest rate. Leave aside the sleight of hand: one-size-does-not-fit-all was first about uncoordinated business cycles, not public deficits. Leave aside that many crisis-struck states did not indebt themselves in the boom. Instead, note that the premise is plain wrong: one look at the eurozone today disproves that currency union entails the same borrowing costs for all.
True, Athens and Berlin were once charged the same rate. But consider who else investors were throwing money to at the time. If they could lend to American housebuyers with no income, or Icelandic banks with no experience, why should they not have lent to European sovereigns – with the euro or without? Our best guess must be that in a world with no euro the same crazy capital flows would have thrown real price levels out of kilter. It is not the euro’s fault that investors, policy makers and academics failed to spot the dangers. The single currency’s good name has been tainted by being born to a house of financial orgies.
It is not that the euro has made no difference to the nature of the crisis or solutions to it. The combination of national debts with supranational money does make it hard for euro members to follow the UK’s strategy of monetisation as a way to nip bond market panics in the bud. In this sense, the euro was clearly not designed for today’s challenges. But can it be claimed for any economic model that it was well-prepared (or prepared at all) for the worst financial crisis since the 1930s?
The failure to stem the panic is a matter of the politics of Europe, not the economics of the euro. The best policy – turning eurozone rescue funds into banks that could tap European Central Bank funds – is frustrated only by political resistance. If, say, a new US administration banned quantitative easing, the bond market panic this would trigger would not mean that the dollar is an unsuitable currency.
So what of the future? Sceptics complain that crisis-struck countries cannot devalue. They are vague on why they prefer external devaluation to the internal kind that peripheral euro members are already engaged in. Devaluing a currency is quicker: it impoverishes the population faster – and usually too much – so as to adjust “from below”. Internal devaluation is a grinding adjustment “from above”. Both are painful; the difference is that the latter keeps up the pressure for reforms peripheral members need. Ejected from the euro they would languish in Europe’s backwaters for a very long time.
If monetary union has not lived up to expectations, we must put our eyes back on the prize: European growth buttressed by a huge home market deepened by freedom from currency fluctuations. Blaming the euro for Europe’s woes is like chastising a child for falling short of her potential. As disappointing as the young adult may turn out, it cannot be better to dismember her than to focus on what was so promising in the first place.