The Euro – A Diamond That No Longer Sparkles
The “Euroskeptics” have been emboldened by the recent ‘no’ vote on the European Constitution in both France and the Netherlands. Now, they are trying to pump water onto the deck of the ship of Europe by casting doubt on the wisdom of continuing with the euro, the common European currency. Those doubts have had a serious impact on the value of the euro. European political authorities have responded that “The euro is forever.” However, the crisis is much deeper than anyone could have imagined even a month ago. Leaders need to act decisively to prevent this outbreak of “Euroskepticism” from irreparably damaging their common currency.
On Friday, June 3, the political and financial communities of Europe awakened nervously to some surprising declarations from Roberto Maroni, Italy’s minister of labor. Maroni is a member of the Northern League, a party that belongs to the coalition government of Silvio Berlusconi. Maroni told La Repubblica, the Italian daily, that he was thinking about asking his party to launch a campaign to hold a referendum on the possibility of abandoning the euro and returning to the lira.
His comments set off alarms, because it was the first time that a senior official in a Eurozone government openly proclaimed his disenchantment with Europe’s common currency. In addition, Maroni did so at a key moment, during the same week when France and the Netherlands, two of the founding countries of the Union, said ‘no’ to the European Constitution.
“Clearly, the Italian minister’s initiative was politically opportunistic,” says Federico Steinberg, a professor at the Autonomous University of Madrid. However, such a move “would not be helpful either for Europe or for Italy, because if it could wind up headed for a grave economic and financial crisis,” he adds.
Antonio Fatás, dean of the MBA program at the INSEAD business school, shares that point of view. “Maroni’s comments are purely politically and without any economic value. If Italy were to leave the Eurozone, its interest rates would rise by 2 or 3 percentage points. The new currency would decline in value, and that would probably force the Italian government to go back on its promise to repay its debt. In other words, it would declare itself in default. This is a crisis scenario,” he adds.
The European Response
Although Maroni’s comments are considered purely opportunistic, they have generated deep concerns. Some leading European politicians reacted that day by emphasizing that the euro is a solid long-term concept. They do not feel threatened by short-term conditions. Meanwhile, Pedro Solbes, who is Spain’s minister of finance, declared that “the Euro is forever,” just like a diamond.
However, is that really the case? “No human endeavor lasts indefinitely,” says Juan Antonio Maroto, a professor at the Complutense University of Madrid. “History shows that it is always possible to go backwards. There will always be a risk of returning to previous currencies. In fact, that is why people express opinions like the Italian minister’s view,” he explains.
Looking look at currency markets, it’s clear that there is concern about the euro. In the course of a few weeks, the value of the euro fell about five percent versus the dollar. The euro reached its lowest point in almost ten months, less than €1.21 to the dollar. The European currency has taken a significant move backward from the heights it scaled last December, already declining by almost 12 percent from then.
“It is a significant drop, but the setback hasn’t gotten people thinking that [global financial] markets will no longer support the Economic and Monetary Union, and it will go under,” says Steinberg. “The situation would have to get a lot worse [for that to happen].” In his view, “The correction of the euro means merely that a retreat took place because of rising uncertainty about what authorities will be doing from now on.” However, Steinberg recognizes, “it is already dangerous that the very possibility of abandoning the euro is being brought up in current discussions about constructing Europe.”
Twenty-First Century Despotism
To analyze this question in depth, you have to go back to the point when this outbreak of skepticism began. That point is the negative reaction of the French and German people to the constitutional treaty. Almost all experts explain those ‘no’ votes by referring to the excessively political environment developing in the European Union. “They have not given a voice to the people,” says Maroto. “We are undergoing a twenty-first century enlightened despotism. Not for Europeans but without Europeans.”
In his opinion, a serious problem is that the Constitution “wanted to rewrite history entirely. This is a mistake. It is an intolerable treaty because it imposes a very heavy burden. It is impossible for people to look at the future if they have to spend all their time looking backward. It is very hard to think about where to go, if you are always thinking about where you came from. So much of the European Union’s bureaucracy has lost its imagination, which is a key for finding solutions to problems they are approaching,” he notes.
According to Steinberg, “The consequence of the French ‘no’ vote is that we will have to start all over again. We will have to stop and analyze some areas in depth, like defining what the European social model really consists of, so we can take that into account when we make decisions.”
Do those problems really affect the European Economic and Monetary Union? According to Antonio Fatás, “Indirectly, they do. However, from the practical point of view, little is going to change. The biggest risk is that future economic reforms will dry up. However, I now see a real possibility that the European monetary plan will be abandoned, and things will move in reverse.”
In recent quarters, growth in the largest nations in Europe has been stagnant. There have even been some periods of negative growth. In addition, unemployment in Germany reached 4.8 million in April, the highest figure in that country since the Second World War.
Blaming the Euro
This is not the best environment for building trust in the economy of the Eurozone, and its currency. According to a recent public opinion survey in Germany, 59% of the population would prefer to return to the Deutschmark, and abandon the euro.
Stern, the German magazine, published a report that was vigorously denied by authorities. Reportedly, members of Germany’s Bundesbank and its Ministry of Finance had gotten together to analyze the damage the monetary union was inflicting on the German economy. Supposedly, the analysis showed that the euro had deprived the economy of 1.4 percent of its growth. “Whenever things go poorly, there is a temptation to blame someone. Now, it appears that the euro is getting all the blame,” says Maroto.
Maroto adds, “What is missing is a promotional campaign. They have to highlight everything that has been achieved with the EMU [European Monetary Union]. The financial situation for every citizen is better since the arrival of the euro. Low interest rates allow us to consume [more easily], and make investments that we could not make if interest rates were high. We have to make a rational appeal [to people] about what we have achieved.”
Maroto adds, “The euro has become the second-most important currency in the world. That has provided some advantages that local economies could not have achieved. Although it does not look that way, the euro has given back to Europeans a part of the monetary sovereignty they had lost over time as a result of globalization, and the free global movement of capital, which reduced the impact of decisions made locally. The greater scale of the EMU has allowed Europe to recover part of its sovereignty, since every country now has a voice in this area, within the European Central Bank.”
Maroto emphasizes that, thanks to the currency, Europe has achieved the price stability that “was necessary for creating a true internal market. In Europe, we have never liked variations in [our] exchange rates. And the euro has put an end to those fluctuations,” he explains.
According to Maroto, one of the factors that led to the rebellion of the Italian labor minister should actually be seen as a virtue. “The Monetary and Economic Union is preventing governments from using artificial measures to increase their competitiveness, such as currency depreciation.” The Italian government would like to devalue its currency, in order to make its products more competitive in global markets, and promote exports. That’s the way things used to work.
A Need for Reform
However, Steinberg notes, “Devaluations only have a stimulatory impact in the short run. When there devaluation takes place, there are always secondary political and economic repercussions. That’s what happened with Spain’s devaluations in 1992 and 1993. You make your exports more attractive, but you also make your imports more expensive.” In his view, “Italy’s problem is not the euro but its structural weaknesses, such as a lack of flexibility in its labor market, and its inability to be defend against competition.”
Paul Isbell, an analyst at the Real Instituto Elcano, broadened this concept to all of Europe in a recent published report. “The common currency and monetary policy of the ECB [European Central Bank] are not part of Europe’s problem but an essential part of any response Europe makes to the important economic challenges it faces,” Isbell explains. “Nevertheless, the euro and the ECB are not enough by themselves to enable the Eurozone to function more efficiently. Nor are they sufficient by themselves to enable Europe to recover a clear degree of sovereignty in its monetary policy. The way things are set up, the EMU is also incapable of raising productivity, and rescuing the European welfare state from total destruction.”
In his view, “If Europe is to achieve those goals, it must rapidly carry out other complementary political reforms before it is too late. Sadly, the key points in these reforms (which involve the labor market, along with greater effectiveness of economic governance, and coordination of fiscal policy) face enormous obstacles to becoming a reality,” he notes.
It is not simply about making labor markets more flexible. Maroto notes, “Let’s think about who is going to generate jobs in the European Union. Will it be small and medium enterprises? If so, why do we have a tax regime that hurts those sorts of companies and benefits large companies? You cannot put a higher tax burden on your return from labor than on your return from capital. If you damage creativity, you destroy the balance. There is an imbalance between the burden placed on work, and the social advantages. How can I continue to be an entrepreneur when I face such high social costs as a result of the new nations entering the European Union?” Maroto wonders. In his view, “You are asking the small business person to bear that tax burden in the name of solidarity with the new members of the Union. But, in return, he derives only disadvantages. You don’t give him enough time to make the changes, or provide him with time to look for creative solutions.”
According to Maroto, Europe’s strained political climate is a key factor responsible for this situation. “When you move hastily, you don’t act wisely. We have to continue making moves but, first, we have to really firm up what is already in place. The problem is, politicians are rushing ahead while leaving behind a whole series of political problems, such as the conflict over the election of [José Manuel] Durao Barroso as president of the European Union. They are also neglecting management problems, such as the Eurostat scandal. These indicators make it clear that they are more concerned about the political environment than about taking effective measures for promoting jobs and creativity in Europe.”
The European Council
It remains to be seen if the political community is ready to listen to the population, following the setbacks suffered by the Constitution in France and the Netherlands, and the outbreak of Euroskepticism that resulted. This week will offer the first opportunity to erase this image of despotism, at the summit of the European Council on June 16 and 17. All of Europe will be paying attention to the message that results.
Fatás says, “I believe that, as on previous occasions, time will pass, tensions will subside, and progress toward integration will continue (perhaps more slowly, and perhaps without a Constitution). In reality, there are no alternatives to the economic integration process and to the euro. This isn’t the first time this has happened to an economic integration treaty, and it won’t be the last.”
Maroto says, “The situation will be put on the back burner, and they will insist on the constitutional process. If they do that, they will be making a big mistake.” In his view, they should take advantage of the situation “to clean the table, and return to discussing what kind of model of Europe we want. Even if we wind up throwing away many plans now on the table, at least the table will be cleaned up, so we can talk. We have to stop and listen to ordinary citizens,” he says.
Little by little, experts hope, things will calm down, and move beyond the current dangerous debate on the common currency. “It’s time now for us to calm down, and not exaggerate things. The world is not coming to an end,” says Steinberg. He believes the agreement that was signed by every member of the EMU is the greatest endorsement of the future of the common currency. “The euro may not be forever, but clearly, if you have a commitment to go back to, it is harder to make a break [with the past]. When a couple goes through a period of crisis, it is more likely that they will stay together if they are married because they have a commitment behind them. Getting out of the EMS [European Monetary System] involved some costs, but you could do it. Things are a lot more complicated with the EMU,” he explains.
France was the fuse that set off the flame of Euroskepticism after the referendum on the constitution, leading to negative feeling about the euro. However, Fatás notes that public sentiment was “less negative [in France] than in Italy or Germany. In France, public opinion turned more against the French government than against European institutions,” he concludes.