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Jiří Weigl: The Financial Crisis - Euro Aspects of the Cures

Ladies and Gentlemen,

It is a great pleasure and honour for me to have the opportunity to address this distinguished audience and to try to develop further the theme of our concern. In my contribution, I would like to concentrate on possible solutions to the euro aspects of the crisis.

The crisis openly revealed the artificial substance of the common currency scheme and proved that euro is one of the major problems amplifying the impact of the crisis and complicating its cures.

Critics of the euro project have for a long time pointed out that the EU and the Eurozone are far from being an optimum currency area in Robert Mundell’s sense and therefore the common currency cannot have the envisaged positive effects on member countries´ economies.  This argumentation has been long time ignored by the European political elites and the majority of economists, but the crisis showed that the critics were right.

The euro has always been primarily political, not economic project and was pushed forward as a strong vehicle which will make permanent deepening of the integration necessary and eventual unification of Europe inevitable.

The architects of the euro project were right, the common currency functions exactly in this direction. The problem is that there are many other and stronger barriers which make the creation of the European Super State impossible.

The economic crisis has sharpened and revealed all these contradictions. It became evident that euro has not harmonized economic development within the Eurozone as initially expected. On the contrary, the less developed and less productive economies concentrated mainly on the southern flank of the Eurozone suffered enormously by the extremely fixed exchange rate regime, which the euro in reality is. They lost international competitiveness significantly; they became victims of real estate and other bubbles, of unsustainable costs of permanently rising unemployment and of problems of banking sectors affecting public finances stability and ability of these countries to finance their debts.

These countries have been trapped in recession and cannot easily get out of it by usual devaluation of their currencies. Furthermore, their ability to accept and implement rapid and adequate economic policy response is limited because of EU legal and institutional framework rigidities and omnipotent Brussels bureaucracy centralizing decision-making within the EU.

It has become evident that because of the crisis the piecemeal approach to create an ever closer Europe reached its limits. Without a transfer union based on full financial solidarity within the Eurozone, the euro cannot survive.  Such solidarity, however, does not exist.  Common currency requires common fiscal policy, common economic policy, i.e. common government what means political union. These are clear and rational conditions which do not exist and will not exist in contemporary Europe.  Maastricht criteria are not sufficient.

The Eurozone tries to get out of the euro crisis in two different ways. The countries of the south that face problems have got accustomed to the previous years of ”unbearable lightness of being” under the euro umbrella and want to keep it.

That is why, they prefer the accelerated creation of transfer union, i.e. they want the rich northern countries, especially Germany, to step in and bail them out.  They are prepared even to sacrifice their sovereignty and democracy in exchange for financial transfers maintaining their unsustainable standards.

The rich countries of the north face just the opposite problem – their citizens do not understand why they should share their wealth with inhabitants of distant and foreign countries.  Feeling this, politicians would like to avoid the introduction of explicit transfer union characteristics.  They would like to keep the status quo as long as possible, postpone radical solutions and in the meantime get better control over economic development of their problematic partners.

 They are pushing southern countries to put their houses in order on their own, to undergo the torture of internal disinflation, never ending fiscal cuts and socially painful reforms.  Under such preconditions they are willing to agree with a partial and limited assistance.  They use the IMF involvement and prepare complicated and severe conditionality schemes for financial assistance programs which turn the recipient countries into a sort of protectorates.

The practical evidence shows that such assistance schemes and their conditionalities cannot solve the substance of the problem. The real main problem is the loss of competitiveness caused by the fact that they would need much cheaper currency than the euro. These countries simply cannot share their currency with the most developed countries of the north without substantial financial transfers.

On the international scene, financial stabilization mechanisms and fiscal pacts have been adopted as an attempt to create a buffer against new threats coming from financial markets and to put public finances deficits of EU countries under control.  Again, the Eurozone just buys time.

In reality, massive but insufficient flow of money from the north to the south exists, gets bigger and bigger and uses as usual many hidden forms, such as the clearing payment system TATGET2. 

Nevertheless, open transfer union or unlimited guarantees within the Eurozone – like e.g. Eurobonds – are and will also be in the future a taboo especially for Germany, because it would be absolutely rejected by the German population.

Picture of Germany dictating severe austerity policy to its former European partners turned into semi-protectorates has devastating effect on psychological atmosphere within Europe reviving old antagonisms, suspicions and hatred.  The smallest feeling of European solidarity evaporates.

On the other hand, a fear of losses for northern, especially German banks in case of Eurozone collapse keeps euro and its zone together. For European political decision makers, it seem cheaper and less risky to postpone difficult decisions, buy time and pretend that they are prepared to defend the project at all costs.

Under such circumstances, it seems impossible to find solution to the euro problem and make it feasible without undergoing catastrophic shakeout. There are, however, logical ways where such a solution could be sought.

One is splitting the Eurozone, leaving existing euro as a currency of the weaker part or vice versa. One factor makes this idea extremely complicated. This is the question of France.  France has always been a key driving force behind the European integration. But now, it does not seem to be strong enough to be able to continue together with Germany, the Netherlands and others from the rich group. An integration block without France and Germany together is politically not imaginable.  That’s why the split does not seem feasible at least in the short run.

The other option is departure of Greece, Portugal, maybe Spain and potentially others from the Eurozone, i.e. from the EU as it exists now. Difficulties and problems connected with the implementation of such a scenario are also enormous and have been discussed extensively everywhere in the last several years. These difficulties should not mislead us or block thinking about preparing joint plans about the Eurozone restructuring. 

It is clear that the present form of the EU and the Eurozone is not sustainable any more. Their survival can be prolonged only by wasting enormous amounts of money, a sacrificing prospect for growth and prosperity for the whole continent. The previous idea, i.e. unification of the EU through common currency cannot work because it is not politically acceptable both in donor and recipient countries.  Unilateral departure of one country seems very complicated as well.

The only possible way out is to fundamentally revise the existing paradigm of European integration. The EU should acknowledge that the member states are the principal building blocks of the integration and stop permanent attempts to centralize decision-making of all imaginable fields of social and economic life on European level.

The EU has to take several steps back, abandon the ambition to create a unified European superpower challenging the USA and China and revive the initial already forgotten driving force – liberalization instead of harmonization and regulation.

Instead of hopeless attempts to put together schemes which could keep the Eurozone in its present form, the EU should prepare plans how to restructure it. The crisis has shown that Europe needs decentralization, not further centralization. Differences and divergent economic developments should be recognized and member countries should be set free to introduce adequate policies. One solution which would fit all does not exist.

Common currency could be limited only to those who share similar level of economic development and characteristics or to those enjoying strong feeling of common solidarity. Otherwise, the euro will strongly require unification policies for which Europe is not ready and for many generations will not be ready. In such a case, we are risking that we will lose all the good that has been achieved on our continent in last sixty years.

Jiří Weigl, Financial Crisis Conference, Budapest, Hungary, November 15, 2013.

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