THE FUTURE OF THE EURO

The Bertelsmann Stiftung organized on the 10th of March a Brussels Briefing*, a meeting for Eurocrats, Europoliticians and Eurolobbyists , about “The future of the Euro: more discipline or more solidarity?” This is not an easy subject because of its complexity. The Euro is  a single currency for countries with different economies, different economic rules, different systems of government, different social and tax systems and different histories.

As long as the Euro-economies were growing, which was the case before 2008, everybody was happy, no questions asked about the Euro except by those whose profession is to be skeptical, as for example monetary experts and economists. When a crisis starts to develop more people become skeptical and critical, especially those who never liked much the Euro and the European Union. People started to look for who should be blamed for the problems. But blaming does not give solutions. In such a situation, it takes a lot of political courage to continue the dialogue for searching a solution. In this sense, the Euro countries have proven, to have sufficient political will and solidarity to solve the crisis together.

During the debt crisis of the last years have been developed new instruments and institutions to stabilize the Euro currency. But as professor Hendrik Enderlein explained on the Brussels Briefing “the crisis is not over”.  It is his opinion that if there are no changes, the Euro will not be viable in the long run because of more divergence instead of convergence between the Euro-countries, unclear competences in EU economic governance and a waning EU legitimacy as for example shows the coming referendum on a possible Brexit.

Europe is still suffering of high debt levels and low investment rates, low economic growth ( a lost decennium since 2008), a reform gap and distrust between the EU members. Besides all this, the EU is confronted with another crisis;  the massive influx of refugees from the Middle East what puts under pressure the Schengen agreement as one of the most practical and concrete results of the EU for Europeans.   

Enderlein therefore advocates a 'Repair and Prepare Strategy' based on the following principles:

As much integration as necessary, as little as possible

EMU level as part of multi-level governance ( EMU: European Monetary Union)

More sovereignty sharing together with more risk sharing.

Although, it was expected as a result of the Euro that the European countries would converge, the opposite happened, the Euro did bring divergence. “This divergence was not really surprising in view of the fact that the euro-area was a heterogenous economic space from the very beginning. Structural differences, such as labor market and product market structures, social security and welfare policies, and the banking and financial systems persisted. They reflect a history of different political choices and economic strategies." (page 13, What kind of convergence does the euro need?, edited by the Jacques Delors Institut and the Bertelsmann Stiftung). 

How do you keep so many different economies in one Eurobasket to guarantee a minimum of Euro Stability? The solution should be more convergence in prices. For example today we are confronted with a single interest rate based on the average inflation rate. “However, inflation rates diverse significantly within the euro area. Thus interest rates will be too low for countries with a high inflation rate, and vice versa. This means that the single interest rate destabilizes the euro. For this reason, inflation differentials should be as small as possible.” (page 13) 

The second requirement for convergence in the euro-area is to make sure that they are on a par with other countries in competitiveness and therefore keep wage growth pace with productivity. “Third, countries in the euro area ought to avoid permanent external imbalances. Both, excessive surpluses as well as excessive deficits, can cause problems for other member states.”

Professor Enderlein prescribes another set of measures to strengthen the single market as to stabilize more the euro: complete the single market for services (in the past strong contested by the European trade unions), improve labor mobility, portability of pension rights, recognition of professional qualifications, cooperation across employment agencies, domestic reforms facilitating price and wage adjustments. It is easy to see that all these measures will lead to much political debate on all levels, including the European trade unions.

Another proposal is to create an European Monetary Fund and the function of European Finance Minister. Both proposals suppose a transfer of  national sovereignty to Brussels and as we know, on this point more people feel  very uncomfortable and are even opposed to loss of more national sovereignty to Brussels. Britain is preparing a referendum on a possible Brexit, in the Netherlands a referendum will be held on the Association Treaty between Ukraine and the EU, in France the nationalist and anti Europe party Front National is becoming stronger and so on.

The 4th proposal is to complete the Banking Union. Although a lot has been done since the debt crisis much remains to be done. An important step would be the creation of a deposit insurance scheme and to organize macro prudential supervision.

In summary, Europe needs more convergence to improve monetary transmission, more risk-sharing to fight fragmentation and sovereignty-sharing to fight moral hazard. This should be based on the basic principle of “as much integration as needed, but as little as possible.” Therefore there is no need for a European super state and room for subsidiarity, in other words “Europe as part of multi-level governance.” Will this be enough to convince the anti Europeans, as well as the international financial markets and the political powers on world level? The answers are hidden in the future.

* Brussels Briefing of Prof. Dr. Hendrik Underlain, Jacques Delors Institut-Berlin & Hertie School of Governance and Dr. Katharina Gnath, Bertelsmann Stiftung, Brussels 10 March 2016