The single currency needs
a robust euro area
by Daniel DAIANU
The Governor of the National Bank of Hungary, Gyorgy Matolcsy, wrote a
piece recently that has, quite likely, raised many eyebrows in the EU (“It is
time to recognize that the euro was a mistake” , Financial Times, 4
November). For it is a sort of a diatribe against the euro, which, allegedly,
was a French ploy to keep Germany well anchored in the EU. In a way, it
sounds like Lord Ismay’s famous saying that NATO is needed to keep
Russians out, Germans down, and Americans in. The text contains a range
of grievances, some of which have been in public debate, under various
shapes, over the years. As a matter of fact, many economists decried the
introduction of the common currency without proper fiscal underpinnings.
Otmar Issing himself, the ECB’s first chief economist, talked about it too.
And let us remember that the McDougall Report of 1977 concluded that an
economic and monetary union needs a significant common budget to make it
viable. An economic divergence between the North and the South of the euro
area is also evident and it cannot be ascribed to extra-euro area phenomena
One can hardly refute what is commonsensical and, more or less, part and
parcel of a collective wisdom regarding what the euro area needs to become
a robust construction: risk-sharing instruments (including a “fiscal
capacity”’) which should not be “junior” to risk-reduction measures, a solid
Resolution Fund, a collective deposit insurance scheme (EDIS), “smart”
fiscal rules (which should not amplify pro-cyclicality in times of badly needed
correction of imbalances), a collective macroeconomic policy stance and, not
least, a joint safe asset that should also help the euro be a more competitive
global currency. A problem, that is alluded to by Governor Matolcsy, is that
political hindrances have stalemated advance. And I would add that,
ironically, Germany, which is, arguably, the biggest economic winner of the
creation of the single currency, seems to underplay this reality; for the euro
has operated as an undervalued Deutsche Mark, which explains its
formidable current account surpluses, year after year, to a large extent. The
Netherlands is in the same category.
But it is one thing to notice major flaws in the euro area design and
functioning, and another thing to state that the euro introduction was a
strategic error. If one accepts that the euro is a strategic and political
construct to help the European Union in global competition and maintain
peace in Europe, its creation was inevitable. Whether its creation was
premature is irrelevant now. What are relevant instead are the weaknesses
of its design, which could not have been inconsequential; some of these
weaknesses were dismissed by politicians, and others were poorly
understood by not a few economists at the time as well.
But let us judge the history and the fate of single currency with the benefit
of hindsight and in a forward perspective. In 1999, China was not the
seemingly unstoppable economic (and not only) juggernaut it is today. And
the US were not, at the time, a bitter economic rival of the EU, which they
seem to become in a world of proliferating “first would be nations” and when
NATO and the transatlantic relationship are, unfortunately, weakened.
There are also European value chains in the euro area, in the EU, which
reflect pretty deep economic integration and which may dent the potency of
independent monetary policies as adjustment tools -though I would refrain
from saying that independent monetary policies are devoid of any usefulness
for larger New Member States (such as the Czech Republic, Hungary, Poland
and Romania) as against currency board regimes. There are also all kind of
new major threats that demand a collective EU response, a cohesive union.
A belief that a partial, or complete, dissolution of the euro area would make
the EU stronger is not convincing at all. A dynamic of events along such
lines would probably cripple the European project fatally. And such a
denoument would be bad for everybody, for the transatlantic relationship as
well. NATO would be much damaged as well.
The euro area needs profound reforms to become robust and, thereby,
strengthen the single currency and the EU as a whole. German minister
Olof Scholz’s proposal about EDIS, though not ambitious enough, goes in the
right direction. And, hopefully, key proposals one finds in the EC reflection
reports of 2017 and in other analytical documents will turn into reality; the
sooner the better. One should not wait for another deep recession to turn
bold and do “whatever it takes to save the euro”, to repeat Mario Draghi’s
famous statement of July 2012.
Reforms in and of the euro area, to make it robust, would be more than
welcome in accession candidate countries. As for its part, the Romanian
economy needs to achieve a critical mass of real convergence and control its
imbalances on a sustainable basis in order to enter The Exchange Rate
Mechanism2 and, after that, join the euro area under auspicious terms.