On the future of the euro and Europe
I had the pleasure this evening of listening to John Peet, the Europe editor of The Economist, giving a brief yet insightful talk on the future of the euro and how it relates to the future of the “European project” – the political and economic institutions that comprise the European Union. Sadly I didn’t take any notes during the talk and subsequent discussion, but here are a few thoughts.
Mr Peet was correct in saying there seems to be something perverse about poorer countries paying to bail out those with more wealth – countries that have already been bailed out (notably Ireland and Portugal) have been asked to contribute billions of euro to a fund that will likely come tobe used to “rescue” the Italian government and European bankers and bondholders.
Another interesting fact briefly alluded to was that traditionally the European elite have been – either intentionally or otherwise – oblivious to their own role in the crisis. Countries – in particular Greece – were allowed to join the euro even though they failed to meet the fiscal and monetary conditions set out under the Maastricht Treaty of 1992. Moreover, many countries had imposed upon them enormously pro-cyclical monetary policies that caused unsustainable booms – here, Ireland is a principal example. Yet Jose Manuel Barroso has laid the blame for the ongoing sovereign debt crisis almost entirely at the feet of the “markets” and speculators, apparently refusing to contemplate the idea that the eurozone optimal currency area was nothing of the sort.
There are however areas where I found myself in disagreement with Mr Peet. I will do my utmost to represent as faithfully as I can his arguments, but I apologise if my recollection overlooks various nuances in his argument.
The prospect of a Britain largely excluded from the decision making process of the European Union (a scenario envisioned by some commentators in the wake of Mr Cameron’s “veto” of fiscal pact negotiations for the currency bloc) is, in Mr Peet’s view, a troubling one. I agree virtually without reservation that decisions imposed upon Britain without British input is a situation that should be avoided, but I don’t think that this entails the need for greater integration of Britain in an increasingly federalized Europe. Indeed, if the goal is for Britain to have as much influence as possible in the decisions that affect it, then the logical solution would seem to be to withdraw from the institutional structures of the Communities and regain “complete” influence on policy.
It was also said that should the euro fail, it would also be the end of “Europe”. It’s not necessarily true that a catastrophic failure of the single currency would lead to a disintegration of the political settlement that governs the twenty-seven members of the Union and political integration existed long before the euro, but Mr Peet is right to say that it would be made likely, with the single market weakening as national governments attempt populist economics in an effort to restore a semblance of stability should national currencies be reintroduced. Where my own assessment differs from the speaker’s is whether this would be a catastrophic event. I don’t think that it would be. Over the past century, the world has seen a trend toward ever-lowering barriers to trade between economies (notwithstanding the currently-stalled Doha round of trade talks) with free trade taking preference over protectionism. There’s no reason to think that, in the long run, this trend would be counteracted by a potential but by no means guaranteed increase in obstacles to trade between European Union members, most of whom recognise the benefits of such policies entirely independent of the existence of the political Union.
Good post. I like the optimism in the face of a Euro collapse. If you have read anything from the Peterson Institute of International Economics, you’ll be acutely aware that this is unlikely to happen though. They recently debated the Euro crisis with the pessimistic side admitting that the Euro in its entirety would not collapse. Germany is too invested in having the value of is produce undervalued compared with neighbouring EU countries which boosts its exports. Merkel will bail out other EU countries if need be.
If the Euro were to collapse, look at the history of Europe. France and Germany have butchered each other for centuries, with England having a go every now and then. WWII cemented the need for European integration and this will not change. Plus, if you are really cynical and believe that corporations have governments in their back pockets, it would be illogical to increase protectionism as the fragmented supply chains of multinationals would see costs increase through tariff hikes.
Economists always like to debate the counter-intuitive. In this case – the collapse of the Euro – it looks far from being a reality. Rather the opposite – deepening of the integration project- looks set to be the outcome, for better or for worse.