IMF Christine Lagarde Believes The Euro Has to Succeed In Order To Keep European Countries Together – How So? EU Countries Will Do Fine Even If Some Eurozone Members Have To Go

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By Paolo von Schirach

April 21, 2012

WASHINGTON – IMF Managing Director Christine Lagarde stated in a public forum hosted by Charlie Rose that she is hopeful about Europe and the future viability of the Euro because the common currency is one big part of a broader coming together of diverse European states moved by a shared aspiration towards political unity. The failure of the Euro would stop this process, she added; and this might allow the resurfacing of old intra-European struggles.

The Euro keeps the peace in Europe?

What? The Euro as anti-conflict antidote? This is a bit odd. Are we to believe that if the Euro in its present form proves to be unworkable, then it is back to the Franco-Prussian war?

Everybody would agree that a successful European monetary union would be a major step forward in the long and tortured European unification journey, (this is assuming –as Lagarde assumes– that there is a shared desire to get to a unified Europe). But to assert that the Euro has to succeed otherwise we may go back to ancient animosities, potentially erupting into fresh conflicts, is a bit odd –especially coming from a former French Minister. It is really a stretch to make a connection between the desire to keep Europe at peace and the Euro as a way to guarantee peace.

The Euro’s problems

No, the Germans are not going re-invade France any time soon, with or without the Euro. That said, the Euro has real problems of its own that have really nothing to do with European peace and security. The Euro is unfortunately the half baked result of a half baked plan. It is an imperfect monetary union in as much as it assumed fiscal restraint among diverse countries that are still sovereign in all matters of taxes and spending. Well, as it turned out, some of them behaved badly and allowed huge fiscal imbalances, disobeying the rules.

The evidence shows that the Southern members, (Greece, Italy, Portugal and Spain), used the lower interest rates provided by a stronger currency to borrow more without considering the long term implications of higher debt levels. Now they are deeply in debt, while their weak economies are structurally incapable of regaining competitiveness. And the austerity measures adopted (under duress) work as recessionary wet blankets, at least in the near term.

Weak members will have to leave

Something has to give. I do not believe that these intrinsically weak Southern countries can catch up and stay within a monetary union that ties them with more productive and fiscally more restrained Northern Europe. They lack the ability and the will to re-engineer themselves, becoming all of a sudden dynamic and innovative societies.

The solution is an exit from a monetary union that was conceived for more advanced economies. Should the laggards have to negotiate their exit from the Eurozone, this would be a big mess, but not an occasion for restarting World Wars. There was no danger whatsoever of another intra-European conflagration before the Euro. If some members have to go, and I really believe they have to, Europe may be more messed up, but it will still be at peace.

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