Short of an economic cataclysm, it is hard to know what abandoning the euro even means
One thing nobody can say about the euro-region crackup: We
never saw this coming. We saw it coming, all right. Europe’s currency area is
falling apart at the very fault lines skeptics described in detail when the
plan was still just a plan.
Sovereign-debt crises in peripheral countries? Collapsing
governance in Italy? German intransigence on “sound money” and the role of the
European Central Bank? Colour me amazed.
Europe’s predicament was not just foreseeable but foreseen.
Yet Europe’s leaders chose not to plan for it. To do that would have tempted
fate and called their commitment to the project into question. They preferred
to say, with pride: There is no Plan B. How impressed we all were.
Unfortunately, that part was true.
In one way, to be fair, the euro-visionaries who drove this
venture have been unlucky. Their system is being tested, perhaps to
destruction, 20 or 30 years too soon.
Their hope was that Europe’s new currency would speed the
development of a European political identity - a necessary condition for
achieving their larger ambition, a United States of Europe. Once Frenchmen, Germans,
Italians and Greeks were citizens of Europe first and of their own countries
second, the project would be strong enough to withstand shocks like those of
recent months or, better, would avoid them in the first place.
Actually, this made some sense. It was a gamble, but it
could have paid off. A European political identity was gradually emerging. You
don’t need to reflect long on 20th century history to understand how valuable
that would be. Closer political and economic integration across the European Union
- adopting the single currency was both at the same time - would accelerate the
process, as well as delivering big economic benefits in the interim.
Trouble was, it needed time to bed down. The institutions of
collective EU policy had already moved ahead of public opinion. Adopting the
single currency was never backed by most Germans. In referendums elsewhere on
EU constitutional innovations, voters often needed to be asked more than once
before they got the right answer. European voters are accustomed to being
bossed around by their politicians, but even they have their limits.
Popular support had to catch up before the institutions of
EU government could be developed much further. That would need to happen for
the euro to succeed. Europe’s elites were relaxed about it: by now this was
standard operating procedure. Thanks to US subprime mortgages, the test came
Europe’s recent disarray arises from the governance gap that
this plan deliberately tolerated. Cycles of boom, bust and acute fiscal stress
in the peripheral countries happened, in part, because the EU failed to insist
on restraint when the new euro members were first able to borrow on far better
terms. Now, in responding to the crisis, the EU is hobbled in the end because
there is no fiscal union. The question of national identity has suddenly come
clear -- nobody wants to pay taxes to help foreigners.
The euro-visionaries’ grand strategic error was to try to
have it all. At certain critical points, the EU faced the choice of (a)
deepening the political integration of its existing members and (b) broadening
the membership to more distant cultural neighbors with less advanced economies
and less reliable governments.
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The right thing was to do one or the other. Build an ever
closer union of similarly advanced and like-minded countries, willing to share
a currency and pool their sovereignty; or choose a wider but shallower union,
akin to Nafta, confined largely to free trade. The EU wanted both: deeper and
wider. That was the crucial error.
The question now is whether Europe still has those choices.
I seriously doubt it. The euro zone might collapse altogether - currency unions
have done so before - but an orderly dismantling is all but impossible to
What politicians have built, you might argue, politicians
can unbuild. It isn’t nearly so easy. When you put a currency union together,
parities are fixed. When you take one apart, they are freed: Why else dismantle
the union but to let exchange rates move? That obvious asymmetry has large
consequences. Who would hold a deposit in an Italian bank if Italy were
expected to abandon the euro? The new lira, in which those deposits might soon
be denominated, would depreciate at the instant of its creation. The mere
prospect would trigger a system-wide bank run.
This is to say nothing of the vast legal and technical
complications that abandoning the euro would involve. When previous currency
unions collapsed, they did so in far simpler financial times. The mechanics of
reintroducing national currencies were tractable. They no longer are.
Financial integration in the euro area is total. Borders to
financial flows don’t exist. Transactions are virtual and instantaneous. The
pattern of cross-border euro-denominated obligations is unfathomably complex.
Which of those contracts would be redenominated? On what terms?
Some choices cannot be undone. In this new financial world,
short of an economic cataclysm, it is hard to know what abandoning the euro
Nonetheless, we may suffer the profound misfortune of
finding out -- unless Europe’s governments see that the only sane choice is to
accept the logic of the currency union they created and the obligations that go
with it. In the medium term, that means closer fiscal union. In the immediate
term, it means one thing above all. The European Central Bank must be granted
whatever powers it may need to underwrite public debts across the EU.
This is something the euro’s creators vowed would never
happen. It violates, they believed, every principle of sound central banking.
They were right: later, those principles will have to be rewritten. Later, too,
the euro area will need new arrangements that bring fiscal union closer. Right
now, though, the euro area needs a central bank that can do for its member
countries what the Federal Reserve does for the US Anything less would be the
EU’s biggest gamble yet.
(Clive Crook is a
Bloomberg View columnist. The opinions expressed are his own.)