Photo Credits: Ottmar Hörl License: CC BY-SA 3.0
Whatever your views on the euro, it’s clear to see that it isn’t in the best of places right now.
Really, it’s a culmination of a number of things that have led to its current malaise, starting from when the concept was first introduced, all the way back in 1993. Six long years and stern British and Danish opposition followed, but on New Year’s Day in 1999, the single currency went from a theoretical concept to a practical reality. It was even used by every country in the then EU apart from the UK and Denmark, who still now have a fixed exchange rate with it. Under the control of the Frankfurt-based European Central Bank, the euro has grown to become the world’s second largest reserve currency, and ECB decisions affect directly 340 million people across the globe. Given all this, the fortunes of the euro take on that much greater global significance worldwide, which is why it’s crucial that it finds its way out of the doldrums or ceases to exist altogether. Draghi and his team have tried to find a way to accomplish the former, however their measures haven’t gone nearly far enough to soothe the economic pain of oh so many. For me, this is because the euro in its current state is fundamentally unworkable; it cannot exist without imposing massive economic damage to a large proportion of its users. Here’s why.
Firstly, what the euro is trying to do is apply uniform monetary policy to a number of different states with different economies and different concerns that need to be assuaged. What this, of course, means, is that some policies will definitely not fit the needs of what some countries desire. As the former Bank of England governor Mervyn King claimed in his first book The End of Alchemy, the discontent caused by some nations having to bail out others (such as Greece recently) for what could be plain fiscal irresponsibility “may become too great to remain consistent with political stability”. I would argue strongly for this, extending on King’s point that this monetary union creates conflict between a “centralised elite” on one side and the “forces of democracy” on the other. Furthermore, I am of the belief that to stop King’s suggested wave of discontent, the only long-term sustainable option available to European policymakers is to bring together these countries in a fiscal union, and thus let the centralised elite coordinate the synergy of fiscal and monetary policy to what they believe to be the best interests of all parties involved. Obviously, there exists a problem with this: the backlash of the masses against what they perceive to be a moneyed elite. We’ve seen this with the famous Brexit and Trump’s election, so even this option presents substantial political risk that could, in my opinion, bring down this monetary union altogether. As we’ve seen here, there really isn’t a path which the EU can go down with this that doesn’t lead to some sort of political backlash or economic hardship: both of which could prove treacherous for the European establishment.
This point also becomes important when you have exogenous shocks affecting economies that cannot use their monetary policy tools to combat them. For example, the European Central Bank has set an interest rate of -0.40% on reserves, which in theory, should stimulate investment and economic growth within member economies. Setting aside the fact that the interest rate channel has proved relatively ineffectual in Europe till date, if it does indeed stimulate growth in a Eurozone economy, what happens if this economy overheats? The natural response would be to encourage saving by raising interest rates, however who now has the power to do this? That’s right: the European Central Bank. This also happens to be an institution who has to take into account the needs of the other tens of countries that happen to be at its monetary mercy, and when you have such an arrangement, be sure that the ECB’s decisions won’t always be what you need. This just makes a potentially negative situation that affects Europe worse, not just for the directly affected country, but for the Europe as a whole. This is because worsening economic conditions within a country could reduce consumer spending and aggregate demand for goods and services within that country and hence worsen export markets for other European countries. The excessive interconnectedness shown here acts as an amplifier that could shave down both European growth and that of the wider world.
However, it’s still possible that through some economic masterstroke, European policies largely benefit a majority of EU states. That’s one route of salvation for the EU, right? Unfortunately, as so occurs when one contrasts theory with reality, it doesn’t seem like this is anywhere close to a reality. Independent research has time and again proven that European austerity breaks the backs of Eurozone countries and further dampens private spending and investment. It seems that senior European policymakers do not see eye-to-eye with many academic experts (such as the famous Stiglitz) on the issue, and hence European growth continues to stagnate. While this is due in part to demographic decline, the lack of jobs in these advanced economies have led to youth unemployment being more than 50% in countries like Spain. When you combine European incompetence with the fundamental unworkability of uniform mass monetary policy, what you get is a concoction that proves so toxic for European economies.
That’s why, for me, the euro can’t work.