Pity the poor euro. It’s a currency, but it’s asked to be so much more. More, indeed, than any currency can possibly be.
The euro was born to glorious pomp and circumstance just 12 years ago, replacing a gaggle of currencies (including the mighty German D-Mark) with a single currency and replacing a collection of central bankers with one powerful voice, the European Central Bank.
The intended advantages of a single currency for all of Europe were obvious enough—no more internal exchange rates, no need to carry multiple currencies, no risk of adverse exchange rate movements. The innovation of currency as a medium of exchange and store of value was a tremendous boon to economic growth millennia ago. Having a single currency for a large and largely homogenous economic area would seem to take these advantages to the next logical level. Inconveniently, electronic commerce and high-speed computers mostly achieve these advantages with or without a single currency.
The euro also meant that the grownups of Europe, especially Germany, would lend their weight to continental monetary policy. In the post-war era, Germany has been the conservative, sound money voice in Europe for well-grounded historical reasons. It made sense for other countries to try to ride on German credibility—a simple trade-off of national sovereignty for the promise of lower inflation and a stronger economy. The Germans had their reasons, too, for adopting the euro, though for many Germans those reasons seem increasingly dubious.
After a reasonably good run, the euro is now perceived to be in grave danger. Peripheral Europe—meaning Greece and Ireland, but possibly also Portugal, Spain, and even Italy—is facing tremendous economic and budgetary strains. The European sovereign debt crisis continues, and as Gordon Brown, the former British Prime Minister and finance minister opined in a BBC interview, there is likely to be “a major crisis in the euro area in the first few months of 2011.”
It is widely assumed that Greece, for example, cannot exit the euro to bring back a deeply devalued Drachma, but economic fundamentals suggest that Greece cannot possibly remain in the Euro. With prices and wages so far out of line with the rest of Europe, it cannot grow fast enough to make adequate payments on the debt it has taken on as part of the bailout. As one senior European Commission official expressed it, as matters now stand, “you can’t make Greece competitive.”
For that matter, as Desmond Lachmann of the American Enterprise Institute notes, the 2011 edition of the crisis could feature financial sector problems at the core of Europe. German and French banks own some $2 trillion of sovereign debt of the weak peripheral countries, putting the core’s financial system very much at risk.
While the membership of the eurozone may change, possibly even radically, what reason is there to think the euro itself will falter? The only true existential threat is Germany abandoning the enterprise. As European leaders construct new financial mechanisms to deal with the current crisis and prevent future troubles, much is being asked of the Germans, and German Chancellor Angela Merkel is uncharacteristically asking much in return.
Her counterparts are not pleased. As Brown expressed it, “The new phenomenon is that the Germans are talking, but they’re not listening. For the first time on a serious issue, I’m upset by German behavior.” Perhaps for this first time on this issue, there are grounds for hope. This does not suggest, however, that Germany will leave the euro but that some current members of the euro fraternity may choose to leave because the frat rules are too tough.
So, again, what’s the real problem with the euro? As a currency, or monetary union, the answer is that there’s nothing really wrong with the euro, per se. There’s no question of the dollar’s viability as a currency if Illinois’s finances collapse, as they may well do. There should be no such question for the euro.
The cause for pity for the poor euro is that to Europe’s intelligentsia, the euro is so much more than just a currency. It is a symbol of supreme political coherence and economic cooperation. It was a crowning political achievement with tangential economic justifications. Consequently, the fate of the euro is wrapped into every discussion of how Europe can muddle through. Europe must clean up its financial system, for example, but the euro abides in any case, just as the dollar will remain a reserve currency for the time being, however well or poorly Washington and Wall Street cooperate to restore the U.S. financial system.
At the same time, by suggesting that the sacred euro is at risk, Europe-first politicians justify the necessity of other policy reforms as necessary to euro survival. Fiscal policy is a good example. Common wisdom suggests that the euro’s troubles may be traced in part to the lack of strict guidelines for fiscal policy across Europe. To be sure, such guidelines would offer certain advantages, especially as insurance against bad behavior such as beset Greece, and thus would be conducive to a more stable, sustainable, and prosperous European economy. In turn, a stronger European economy could translate to a stronger euro. However, the explicit goal should be the stronger economy, not the stronger euro. In the current debate, the symbol tends to supplant the substance.
The value of the euro will rise and fall over time, just as it has done since its inception. Whatever the bottom-line wisdom of its creation and whatever changes occur along the way, the euro as a currency is almost sure to endure. Its prospects would be further enhanced if it were allowed to be a currency rather than a holy symbol of and vehicle for advancing the one-Europe dream.