The Euro: Not Short on Friends, Yet Homeless

An old dog may not be taught new tricks, but the ailing European Union (EU) can be further economically and politically domesticated by enacting necessary reforms to address its sovereign debt crisis. Though many European governments and banks managed to emerge relatively unscathed after the 2008 financial crisis, largely by avoiding American credit markets[i], the EU does not lack its own domestically manufactured financial problems. The concern for the seventeen eurozone countries*(EZC) is managing their sovereign debt, and more importantly their ability to collectively respond to the realities of each member’s respective financial needs. There is serious uncertainty as to whether the eurozone members have the necessary political and economically integrated organizational capabilities to reconcile the euro currency’s current instability.

In 2010, Greece became the first eurozone member to shock the financial world as a result of it’s burdensome sovereign debt mixed with high levels of reckless government spending. The strongest of the eurozone members, Germany, France, and Italy, as well as the IMF responded quickly by creating a financial bail-out packages to avert a Greek default on its debt payments.[ii] As of today, Greece’s financial problems persist due to their failure to reasonably implement the terms agreed upon for the bailout, and the country is now asking for either another financial package or simply a means to ‘orderly default’. Disagreement on how to handle the Greek crisis has become so abundant within the EZC that the head of the German-based European Central Bank (ECB), Jürgen Stark, recently resigned due to “personal reasons.” After Greece, the Irish and Portuguese economies were near collapse and each country subsequently received billions of euros in bailout packages, while many fear Spain will be next in need of propping up. The major areas of concern are predominantly focused on the smaller periphery states, however this changed in July 2011 when Italy began to lose market confidence amid rumors that it would be forced to default in managing its sovereign debt, approximately 120% of its GDP. Great Britain, who has always championed its splendid isolation, warned Europe on September 22nd that it has six weeks to solve this crisis of confidence or risk another global recession.[iii]

These problems have continued to mount for the EZC largely as a result of two institutional weaknesses: First, eurozone leaders are unable to collectively agree as to what is the current next best step to address ailing markets, or where to even begin as EU suffers from ‘dispersed sovereign authority syndrome’. Arguably  somewhat like the early confederation of the American states, this ‘syndrome’ is the result of EU member states not committing to political or economic action that might be either, (a) unpopular with their voters at home, or; (b) diminish their respective domestic political and economic institutions’ influence within the EU framework. The euro currency (created and implemented as early as 1999) was introduced without the necessary institutions such as a centralized, coherent decision-making body, a treasury, and the ability to raise taxes.[iv] So even if the EZC members were in agreement as to a certain course of action, there are no formal mechanisms or procedures on which to follow and therefore would have to “make up the rules as they go along.” The development of a pre-established set of central policies and guidelines to address this and future crises would be an ideal framework for maintaining market confidence in a single currency used by various sovereign nations. EZC leaders continually fail to recognize key fundamental issues confronting the task of stabilizing the euro. For example, European leaders still have yet to admit that Greece’s financial situation is nothing other than insolvent, and; German officials are divided on how much they should use of their own money towards bailing out Greece for a second time.[v] Therefore measures must be implemented in order to salvage a unified Europe, stabilize the euro, and regain market confidence in European financial institutions.

There is No Third Way

Eurozone members must do five things without delay or potentially risk economic collapse. First, the philosophy of Jean Monnet, the ideological godfather of the EU and his improvised, incremental and technocratic approach to EU decision-makingmust be abandoned. Second, EZC members need to lose their pretenses and realistically assess the financial needs and realities of each eurozone member. Third, all relative European banks should be bolstered to deal with sovereign defaults of various EZC members. Fourth, serious macroeconomic integration within the member economies must be undertaken or risk future collapse; and fifth, EZC members should be concerned with the overall vision of Europe itself. In other words, Europe must establish protocols and enact various political reforms to ensure that a crisis like this will not happen again.

Méthode Monnet: Jean Monnet once said that, “Europe will not be built all at once, or as a single whole: it will be built by concrete achievements which first create de facto solidarity.”[vi] Yet this improvised philosophy of European unification has met its breaking point. Either the EZC must create a more centralized structure or risk losing decades of accomplishments altogether. Monnet’s méthode has created two problems that EZC members are currently grappling with: first, it alienates voters of each member country from the affairs of the European Union; and second, it creates a ‘democratic deficit’ within the system. This term, coined by British LaborMP David Marquand, describes what some say is a gap between the powers of the EU and the power of its citizens to influence EU decision-making, thus squashing any attempts at establishing democratically-functioning European institutions.[vii] For problem one, the concern is that there is no accountability in the system or potential for European voters in each country to vote-out members who have invited or exacerbated this crisis. The second problem begs the question as to whether the maximization of sovereignty strategy employed by various EU countries is the proper course towards creating a strong and unified Europe. This maintenance of sovereignty works fine in times of relative calm, but in a crisis enables inaction in the system, and paralyzes essential leadership.

Realistic Assessment: Eurozone leaders, the most influential being Germany and France, need to buckle down and make the difficult assessment that certain countries are no longer solvent. Greece is aware it is unable to realistically pay off all its sovereign debt and therefore has started requesting a way to ‘orderly default’[viii], against the wishes of some eurozone members. Ultimately, eurozone members have to realistically determine which countries are solvent and which are not. By ignoring the realities of the situation, they are setting up the certain failure of their own response to fix this situation and others like it. To rely on temporary financial measures, such as bailouts to institutions that are insolvent, is only ensuring imminent failure at some later point in time.

Keep Banks Strong: The European Financial Stability Facility (EFSF) is a centralized fund that offers capital to banks that need shoring up. However, EZC members must further strengthen the capabilities of the fund in order to meet the financial needs of each country. Strengthening these institutions requires several measures, but the most important is a recapitalization effort for eurozone banks*, only after a more thorough stress test is conducted which should include the possibility of a Greek default and other related scenarios. This process is especially important in relation to French banks, which have lent substantial sums of money to periphery states such as Greece and Spain.[ix] Ensuring this process will enable a more responsive EFSF, and prevent European banks for experiencing the type of systematic failure that was seen in the U.S. in 2008. Doing so will also sufficiently prop up European banks so as to deal with any scenario that would otherwise deepen the crisis if left unattended.

Macroeconomic Integration: The ECB needs to play a stronger role than it already has in managing the sovereign debt crisis. The bank, based in Frankfurt, is unelectable and independent and many of its leaders fear that purchasing more Spanish and Italian bonds could damage the credibility of the young institution.[x] To further integrate the macroeconomic needs of the EZC members, as well as stave off deep concerns regarding financial instability in the region, what is needed is to have the ECB uniformly back all solvent countries. There is fear that Italy would be forced to default on its sovereign debt, not because the debt itself in insolvent, but rather due to loss of market confidence, primarily as a result of political turmoil at home.[xi] Italy, for example, has more capital on hand than Germany, easily relies on domestic lending to ensure market stability and confidence and has shown a willingness to raise taxes when necessary. Therefore when it comes to solvent countries like Italy and Spain, and given their relatively smooth capabilities to domestically reconcile market concerns,[xii] the ECB should publicly guarantee financial assistance to these countries.

The United States of Europe: the fundamental issue underlying the entire EZC crisis is a lack of confidence and strong political unity among member states. The vicious cycle witnessed thus far is the result of a non-unified approach to problem solving, and the pursuit of collective measures that do little to definitively solve the root causes. Italy’s sovereign debt arguably would have never come into question if there was a more cohesive, well-defined central body that instilled confidence in markets and investors. Nor would French banks have ever suffered as much as they have the last two months if the Greek and Spanish questions were initially solved. There are two visions that roughly emerge from this lack of a unified front between EZC members. The first is the concept of an economic government in which countries retain political sovereignty but are more economically interdependent on one another. This is especially popular with the French who wish to maintain a level of influence on par with Germany.[xiii] The second are so-called joint eurobonds that would pool together eurozone members’ resources to back up the issuing of bonds from a central European entity. This approach is not popular with the budget-efficient, and economic power-house Germany, who believes such an idea would “reduce borrowing costs to profligate”[xiv] an assessment not too wide of the mark given Europe’s financial track record.

What needs to be seen in the coming months is the conceptualization and operationalization of a framework that draws Europe closer together economicallyand politically. Maintaining each eurozone members’ sovereignty sounds comfortable and even feasible in times of economic prosperity, but this crisis has been prolonged to an extent that threatens the very existence of the European Union and the euro altogether. Eurozone members need to strengthen and increase the influence of central European mechanisms such as the EFSF, the ECB and institute new powers and organs such as a reasonable tax-raising power and a treasury to prevent future crises. There should be less emphasis placed on national sovereignty and more on a cohesive and central response; especially when the issue at hand involves a single currency. Even with a more economically interdependent Europe, which arguably, already exists, there needs to be further political integration that enables and thus guarantees that if a problem of this magnitude occurs again, eurozone members can and will act in a single front to tackle the problem. If the eurozone and its currency are to be taken seriously, and ultimately strengthened within the global economy, the old dog known as Europe must reform itself or be lost forever.

* The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Some of these countries use the euro as their national currency; others retain their traditional money but peg it to the value of the euro to lessen confusion among traders.

* Recapitalization occurs when a company changes its capital structure by exchanging preferred stock for bonds to reduce taxes or to avoid or emerge from a bankruptcy. Often, new debt (e.g., reorganization bonds) is issued to replace existing debt

[i] “Fears over French Banks: Panic in Paris” The Economist. Sept. 2011.

[ii] “Europe’s Economies: Strong Core, Pain on the Periphery” The Economist. Sept. 2011.

[iii] Giles, Christ, and Alan Beattie. “Global Economy Pushed to the Brink.” Financial Times. Sept. 2011.

[iv] “Charlemagne: The End of Monnet” The Economist. Sept. 2011.

[v] “Europe’s Currency Crisis: How to save the Euro” The Economist. Sept. 2011.

[vi] “Charlemagne: The End of Monnet” The Economist. Sept. 2011.

[vii] Ibid.

[viii] “Europe’s Currency Crisis: How to save the Euro” The Economist. Sept. 2011.

[ix] “Fears over French Banks: Panic in Paris” The Economist. Aug. 2011.

[x] “Europe’s Currency Crisis: How to save the Euro” The Economist. Sept. 2011.

[xi] “Italy: Trashing the Lifeboat” The Economist. Sept. 2011.

[xii] Ibid.

[xiii] “Charlemagne: The End of Monnet” The Economist. Sept. 2011.

[xiv] Ibid.


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