Can the Euro be Saved?
EU leaders have clearly shown the desire (I wouldn’t call it “will” though) to save the common currency. And, contrary to many other commentators, I think the euro will survive. But like everything in Europe these days, it will only live on life support, a bare minimum EU leaders will be able to commit to – and actually execute.
Since 2011 a new set of regulations, called the “Sixpack”, have been passed in the aim to penalize countries which are breaching SGP rules – and have failed to improve. Whether they will have any impact is yet to be seen, but typically all similar solutions formulated in the past turned out to be toothless and used, at best, for political leverage.
Euro will not cease to exist, but – under current political circumstances – it will also not enable Europe to grow to compete on level terms with United States, China and, in the future, India.
So if it’s posing so many challenges, let’s rephrase the original question:
Should the euro be saved?
Maybe it would be better to give up and abandon the common currency, then? If EU members continue to struggle with utilizing its potential, why keep forcing it on them?
“Europe’s common market exemplifies a situation that is unfavorable to a common currency. It is composed of separate nations, whose residents speak different languages, have different customs, and have far greater loyalty and attachment to their own country than to the common market or to the idea of “Europe.” Despite being a free trade area, goods move less freely than in the United States, and so does capital.”
He diagnosed the situation in Europe before adoption of the common currency with typical simplicity and wisdom and I generally agree with his assessment:
- Yes, conditions for implementation of the euro were not entirely favorable.
- Yes, Europe is divided, speaks many languages and people, goods and capital are not as mobile as they are in the US.
- And, finally, yes, euro was primarily a political project, aiming to bind Europe closer together.
However, I think Friedman’s diagnosis also exemplifies where the differences in opinion between economists and politicians stem from. Economists give preference to economic factors in evaluating the union – politicians, on the other hand, consider that economic terms can be improved with time, while political unity is growing in people’s minds.
Since I’ve dabbled with both, economics and politics, in my life, I will attempt to bridge these views here.
The paradox is that these obstacles – which Friedman accurately points out – are precisely why the euro was introduced. For an economist they were almost disqualifying for the monetary union – for a politician, however, they were the key arguments supporting its creation.
EU started as an effort to establish peace on the Old Continent, but with time it transformed into a lifeline for entire Europe – if it wants to retain any political meaning in the future. Globalization (resulting in quick convergence) coupled with growth in population accelerated the rise of new superpowers. No European country is strong enough to be a serious player on a global scene of the future on its own. Can anybody imagine even 80 million Germany negotiating on level terms with 1300 million China?
Europe cannot wait another few hundred years for its nations to gradually mix and perhaps even speak the same language. It may never happen. European integration needed a catalyst to help build a common European identity. Because there was no historical precedent, a pan-European project that could create this identity, such a precedent had to be created.
A free trade zone is not enough – it only facilitates movement of goods, not people and not culture. So euro was designed to be a tangible representation of European integration. By abolishing national currencies it was meant to remind people every day that now they are all a part of a single, united continent.
Of course, EU leaders must have anticipated that problems – both political and economic – would appear along the way. But the euro was created to stay here forever and we already witness the growth of new generations, who don’t remember their countries without it.
Interestingly, this is not the first time an economic union was used to pave way to political integration.
Germany as we know it today is a product of just such a project – a free trade and monetary union which gradually transformed into a unified, political entity.
Germany didn’t even exist until late 19th century, being broken up into dozens of states, remnants of political turmoil of the past few hundred years. It was through a customs union (Zollverein), followed by adoption of a common currency, that the eventual German Empire was created, barely 140 years ago.
So while political unity might pave the way to economic integration – this example shows that the same is possible the other way around. Of course, German states had several advantages over the modern EU – such as common language and fairly similar cultures. That said, Europe of today has modern technologies, telecommunications and transportation allowing for travel between its most distant parts within a few hours. It’s much smaller and much less divided than it used to be.
Establishing European identity won’t be easy, but it lies within the realm of possibility – and 21st century like no other before allows to hope this goal can materialize. It won’t, however, as long as economic recklessness prevails while international treaties remain empty declarations, symbols of good intentions – which, as we know, road to hell is paved with.
For euro to just survive little more than political will is needed. But to make it a cornerstone of European integration, allowing the continent to thrive in the future and keep its place among global superpowers, Europe needs more responsibility, hard work and honesty instead of cheap populism.
Without a quality change in European politics, without fiscal and monetary responsibility, it doesn’t really matter what currency is in circulation – it won’t prevent European demise, which, as the recent crisis shows, has already begun.