The Euro: Not Short on Friends, Yet Homeless
An old dog may not be taught new tricks, but the European Union [EU] can be further economically and politically domesticated by enacting necessary reforms. Economists have identified the EU as the second largest economy to that of the United States, yet if the global economy needed to collaborate with Europe, whom do they call? Many European governments and banks managed to emerge unscathed after the 2008 financial crisis largely from avoiding the American credit markets[i], however the euro zone is not short of its own domestically manufactured financial concerns. The problem for the seventeen “euro zone” countries is managing their sovereign debt; and more importantly, the group’s ability to collectively respond to the realities of each euro zone member’s respective financial needs. There is serious concern as to whether the euro zone members have the necessary political as well as economically integrated and unified organizational capabilities to reconcile the Euro’s current instability.
Greece was the first euro zone member to shock the euro financial world as a result of their burdensome sovereign debt mixed with reckless levels of government spending. The economically biggest and strongest of the euro zone members, Germany, France, Italy, as well as the IMF responded quickly by creating a financial “bail-out” package to avert a Greek default on its debt payments.[ii] As of today, the “Greece problem” persists due to its failure to implement the terms agreed upon for the bailout, and is now asking for either another bailout or simply a means to “orderly default”. Disagreement on how to handle the “Greek question” has become so apparent within the euro zone that the head of the [German-based] European Central Bank [ECB] has resigned due to “personal reasons” [and yet the ECB is the most responsive actor in this crisis thus far, which is not very reassuring at this point]. After Greece came Ireland’s troubles, Spain and Portugal were also feared to be next in line and in need of some form of propping up. The major areas of concern is mostly centered on the smaller periphery states, however this changed in July 2011 when Italy began to lose market confidence [rumors circulated that Italy would be forced to default] in managing its sovereign debt [120% of its GDP], seeing bond yields rise by almost 1% in two trading days.[iii] Great Britain, who has always championed the cause of splendid isolation, warned Europe that is has six weeks to solve this crisis of confidence or risk another global recession[iv]; a sound piece of advice to a squabbling Europe, and music to our ears on this side of the pond.
The problems have continued to mount for the euro zone members largely as a result of two weaknesses: first, the euro zone leaders are unable to collectively agree as to what is the current next best step, or where to even begin [the EU suffers from “dispersed sovereign authority syndrome”, or “prideful decentralized name-calling”]. The euro currency was created without the necessary institutions such as a treasury, the ability to raise taxes, and a centralized, coherent decision-making body.[v] So even if the euro zone members were in agreement there is no formal mechanism or procedure on which to follow and therefore would have to “make up the rules as they go along,” not exactly the ideal framework to instill market confidence. Secondly, euro zone leaders continue to fail to recognize key fundamental issues confronting their task of stabilizing the Euro currency. Now is the time to “get serious”, even if it costs euro zone leaders an election at home. For example, the various euro leaders still have yet to admit that Greece’s financial situation is nothing other than insolvent. German officials are divided on how much they should use of their own money [or the ‘taxpayers money’] to put towards bailing out Greece for a second time who is singing a song, or rather kicking and screaming the cries of “orderly default”.[vi] Therefore various measures must be implemented in order to salvage a unified Europe, to stabilize the euro, and regain market confidence in the European financial institutions.
There is No Third Way
The euro zone members must do five things without delay. First, the philosophy of Jean Monnet, the “godfather of the EU” and his improvised, technocratic approach to establishing the EU framework must be abandoned. It is not a responsible approach to the more concrete issues Europe faces today. Second, euro zone members need to lose the pretense and realistically assess the financial realities of each euro zone member. Third, all relative European banks should be bolstered in dealing with sovereign defaults of various euro zone members. Fourth, there needs to be serious macroeconomic integration within the member economies or risk future collapse. Lastly, the fifth concern should be the overall vision of Europe itself. In other words, Europe must establish protocol and enact various reforms to ensure that a crisis like this will not happen ever again. I would go so far as to suggest entertaining Joschka Fischer’s call for a United States of Europe, something France would not support in its constant efforts to seek parity with Germany.
Méthode Monnet No More: 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.”[vii] Yet this improvised philosophy of European unification has met its breaking point: either Europe must seek a more centralized structure or risk losing everything altogether. This méthode has created two problems that the euro members are currently grappling with at the moment: (1) it alienates voters of each member country in the affairs of the central European government, and; (2) it creates a “democratic deficit” within the system, derived from member countries ensuring their “sovereign rights” are not trampled on.[viii] For problem one, the concern is that there is no accountability or potential for European voters in each country to “vote out” the members who have invited this crisis in the first place. The second problem, begs the question as to whether this “maximization of sovereignty” is the proper course to pursue toward creating a strong and unified Europe. This maintenance of sovereignty works fine in times of relative calm, but in a crisis that same quality enables inaction to run rampant through the system, thus paralyzing any essential leadership.
Realistic Assessment: euro zone leaders, the most influential being Germany and France, need to buckle down and make the difficult assessment that Greece is no longer solvent. Greece is aware it is unable to actually pay off all its sovereign debt and therefore the country has started the request of finding a way to “orderly default”[ix], against the wishes of some euro zone members. Ultimately, the euro members have to realistically determine which countries are solvent and which are not. By ignoring the reality of the situation, they are setting up the certain failure of their own response to “fix” the situation. Like any effective problem-solving venture, one must outline the problem to be tackled; to paint a prettier picture is only ensuring imminent failure.
Keep Banks Strong: The European Financial Stability Facility (EFSF) is a centralized fund that offers capital to banks that need shoring up. Euro zone members must strengthen the capabilities of the fund in order to meet the financial needs of each country’s financial institutions. To further strengthen these institutions there needs to be a recapitalization effort for banks, only after a more thorough stress test is conducted which should include the possibility of a Greek default, among other related scenarios. This process is especially important in relation to French banks, which have lent substantial sums of capital to periphery states such as Greece and Spain.[x] Ensuring this process will enable a more responsive EFSF to European financial institutions, as well as sufficiently prop up European banks to deal with any potentialities that would otherwise deepen the crisis if left unattended.
Macroeconomic Integration: The ECB needs to play a stronger role that it has already been playing within this crisis. The German-based bank is unelectable and independent and many of its leaders fear that purchasing more of Spanish and Italian bonds could damage the credibility of the still young institution.[xi] What should be done to further integrate the macroeconomic functions of the euro zone members, as well as stave off deep concerns of financial instability within the region, is to have the ECB 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 confidence, primarily as a result from political turmoil at home.[xii] Italy, for example, has more capital on hand than Germany, and easily relies on domestic lending to gain market stability and confidence; and the country has been known to raise taxes when necessary. Therefore when it comes to solvent countries such as Italy and Spain, and given their relatively “smooth” capabilities to domestically reconcile market concerns,[xiii] the ECB should publicly guarantee any financial assistance to these countries; for example, purchasing their government bonds, thus ensuring a boost in market confidence.
The United States of Europe: the fundamental issue concerning the entire euro crisis is, confidence. The vicious cycle witnessed thus far in the euro zone is the result of a non-unified approach to solving this crisis, as well as pursuing collective measures that do little to solve the problem, just prolong it to a later date [Europe has refined the art of claiming grandiose achievements only to pay the more burdensome price at a later date]. Italy’s sovereign debt would have never come into question if there was a more cohesive, well-defined central body that instilled confidence in markets and investors; and French banks would never have 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 euro zone members: first, the concept of an “economic government” where countries retain political sovereignty but are more economically interdependent of one another. This is especially popular with the French who wish to maintain a level of influence on par with Germany.[xiv] The second is “Joint Eurobonds” that would pool together euro zone members’ resources to back up the issuing of bonds from a central European entity. This is not too popular with the budget-efficient, and economic power-house of Germany who believes such an idea would “reduce borrowing costs to profligate;”[xv] an assessment not too wide of the mark given Europe’s financial track record.
What we need to see in the coming months is the conceptualization and operationalization of a framework that draws Europe closer together economically, if not politically. Maintaining each euro zone 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 currency altogether. Euro zone members need to strengthen and increase the influence of central European mechanism such as the EFSF, the ECB as well as institute new powers and organs such as a reasonable tax-raising power and a treasury for starters. There needs to be less emphasis 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 already arguably exists], there needs to be further political integration that enables and thus guarantees that when a problem of this magnitude occurs, euro zone members can and will act in a single front to tackle the problem, and reduce the potentialities of losing market confidence. This will take the longest of all to realize, and would involve countless new treaties and agreements between the euro zone nations. If the euro zone and its single currency are to be taken seriously, and ultimately strengthened within the global economy, this old dog known as Europe must reform itself or be lost forever.