After tortuous and seemingly perilous negotiations, Greece
and the Eurogroup appear to have managed to put off another eurozone crisis
involving Greece for another four months. There are varying commentaries about
who won, the Greeks or the Germans. The bigger question, though, is whether
Europe won.
I have thought from the beginning of the euro that the
establishment of a single currency was a mistake. Europe is not an optimum
currency area. There is no strong central government establishing fiscal policy
for the region; fiscal transfers, as we have seen vividly demonstrated, among
the countries are far from automatic; and there are marked cultural and
linguistic differences, which serve to limit labor mobility among the countries.
(I previously wrote on this here.)
In other words, establishing the euro was putting the cart before the horse;
the Eurozone needs to be more integrated in some sort of federation to avoid
careening from crisis to crisis during difficult economic times.
The establishment of the euro was propelled by the French, who
reportedly made it a condition for supporting German reunification. The
French were no doubt hoping to improve their role in the world while
constraining Germany, which would be by far the largest country in the European
Union after reunification. In other words, the euro’s creation was done more
for political reasons than economic ones.
As for the French, Martin
Feldstein wrote in 2012:
“The European project has clearly failed to achieve what
French political leaders have wanted from the beginning. Instead of the amity
and sense of purpose of which Monnet and Schuman dreamed, there is conflict and
disarray. Europe’s international role is shrinking, with the old G-5 having
evolved into the G-20. And, with German Chancellor Angela Merkel setting
conditions for the eurozone, France’s ambition to dominate European policy has
been thwarted.
“Even if most eurozone countries retain the single currency,
it will be because abandoning the euro would be financially painful. Now that
its weaknesses are clear, the euro will remain a source of trouble rather than
a path to political power.”
What the Greek situation demonstrates is the Europeans’
failure to decide whether they want a deeper union. After the cold war ended,
as observers noted, Europe was faced with a choice: a broader European Union or
a deeper one. It has tried to have both by broadening its membership and
introducing the euro. It’s not working.Moreover, there is now a two tier Europe, with some EU countries using the euro and other not. In the UK, which in my view was correct in not joining the euro, there is a significant political movement advocating leaving altogether, with the current government planning a referendum on the subject should they win the next election (or perhaps sooner than that). The Cameron government wants to stay in the EU, but on renegotiated term that would make it sort of an associate member. (As an aside, permit me to observe that French President Charles de Gaulle had a point when he doubted the European credentials of Britain when he vetoed British membership in the European Common Market, which then only had six member states.)
Even though the euro was a mistake, this does not mean that
the correct policy now is to get rid of it. The Europeans, or some subset of
European countries, have to decide what sort of federation they want. But
European politicians, reflecting the ambivalence of their constituencies, have
not shown an ability to face up to the implications of having a common currency
and the current crisis has been needlessly compounded by a German insistence on
austerity, which is a mistake both from an economic and political standpoint.
Kicking cans down the road and imposing wrongheaded economic
policies on the poorer, indebted countries of the EU cannot be a long-term
strategy for success. At some point, the EU will have to face up to the underlying
problems with the euro.
