ANALYSIS
EUROPE
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THE INVESTOR
bank with real powers as lender of last resort;
closely aligned tax-and-spend policies, assuming that
full-blown fiscal union is a step too far; and more
political union, even if the eurozone only maintains
the appearance of federalism. On all three counts,
Europe still has a long way to go.
While there has been progress towards creating a banking union,
that is mainly seen in the centralised supervision of banks by the
European Central Bank (ECB) and the national competent authorities.
‘There is no real financial backstop backed by the weight of EU
governments and no common deposit insurance to discourage savers
from transferring funds to accounts in other EU countries [as happened
in Greece],’ says Matthijs.
The ECB may have embarked on quantitative easing in order to
kick-start growth, but its bond purchases are linked to the size of a
country’s economy so it is obliged to buy German bonds rather than
concentrating its firepower where it is needed.
Issuing eurobonds backed by all member states might offer a more
economically viable solution in the long term, according to De Grauwe.
But he thinks that political factors make this unlikely because Germany
is strongly opposed to the pooling of member states’ debt obligations.
There are also serious differences between Germany and other
key players on how to move towards further fiscal and economic
integration.‘Germany wants stricter rules and more transfer of
sovereignty to a technocratic body dominated by itself, while France
and Italy want looser monetary policy while retaining tax and spending
powers,’ said Matthijs.
This could develop into a fault line at the very
heart of Europe.‘France does not want to transfer
tax-raising powers, which it sees as a very intrusive
transfer of sovereignty,’ says De Grauwe.With
the rise of populist parties in France, Italy, Spain
and even Germany, traditionally pro-European
politicians have to be seen to be guarding the‘national interest’.
Matthijs notes that the possibility of Grexit could well return. If
Greece’s economy survived a departure from the euro, politicians in
countries such as Italy might be tempted by the prospect of an exit
and the sharp currency devaluation that would likely follow as a means
of escaping decades of economic stagnation. For a founder member to
leave, however, would almost certainly sound the death knell of the euro.
‘The eurozone remains very fragile,’ says De Grauwe.Yet, by some
measures, its economic base is stronger than that of countries such as
the US or Britain that have long benefited from real political union,
common taxes and a single central bank.
The eurozone as a whole is far less indebted than theAnglo-Saxons
or the Japanese,Mitchell points out.‘Total private- and public-sector
debt as a percentage of GDP is far lower, and across Europe there are
world-class companies, such asAirbus, Siemens and Bayer, that form
part of the most effective industrial base in the world.’
Provided politicians remain committed to the European project, the
euro’s recent crises might ultimately be seen as mere teething problems.
Germanywants
stricter rules, while
Francewants
loosermonetary
policy
It is sometimes said that the world’s only successful currency union
is the US dollar. That may be true, in terms not only of its staying
power but also it becoming effectively the world’s reserve currency.
But as Professor Richard Roberts of King’s College London
points out: ‘There have been other currency unions that could be
described as successful.’ Both the German mark and Italian lira
replaced a multitude of regional currencies after these countries
achieved political unification, and they survived multiple crises
until they were voluntarily merged into the euro.
More comparable to today’s eurozone is the Latin Monetary
Union, launched in the 1860s and comprising France, Belgium,
Italy, Switzerland, the Vatican and Greece. ‘It was based on member
countries aligning their coinages so that gold and silver coins
minted in each country were of a standard weight and fineness of
metal, and freely interchangeable across the area,’ says Roberts.
‘Most countries adhered strictly to the rules, although the
Vatican was expelled for abusing the system, including issuing
debased coinage, while Greece was only allowed to join on
the condition that France controlled the minting of its coins.’
Otherwise, the Latin Monetary Union continued successfully until
the First World War, when governments started printing money. It
was formally wound up in 1927.
The Scandinavian Monetary Union, launched in the 1870s,
allowed Sweden, Denmark and Norway to share interchangeable
currencies and, again, says Roberts, ‘it functioned smoothly until
the Great War threw their separate currencies out of alignment’.
The same fate befell the 1867 Austro-Hungarian Monetary
Union, whereby the merger of two sovereign states with
separate parliaments, budgets and government departments was
underpinned by a single central bank and currency. But after 1914,
the central bank lost its independence, the government started
printing money four years later and the Habsburg Empire collapsed.
Currency unions were probably easier to manage when based
on precious metals rather than the creditworthiness of paper
currencies. But Professor Roberts says: ‘All such arrangements have
huge potential to be abused by “free-riders”.’
Similar concerns over moral hazard underpin Germany’s
current stand on the euro, which is why a continued diet of
austerity and doing the least possible through bailouts are its
preferred options for keeping the euro intact.
CURRENCY UNIONS
Stocksy
Balance sheet
The eurozone has survived the Greek crisis intact but there are
those who believe its current set-up doesn’t help avert future crises.
