The Real Trouble With The Euro The EU monetary union project was based on bad assumptions. Too many differences among Eurozone countries

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WASHINGTON – The media love financial crises. And now they have the deteriorating Greek situation to talk about. I have no idea about how this tragedy (or is it a farce?) will end up.

Flawed monetary project 

But I believe that some simple considerations are in order. The whole “Euro Project” was poorly conceived. The notion that a new, effective monetary union would become some kind of “aggregator”, a powerful incentive to strengthen political and institutional ties among the EU countries that would join the monetary union, was profoundly misguided.

The mistake was in the belief that the goal of monetary union deep down was a political goal. A common currency was supposed to indicate the will to create a common political future among equal countries. 

First the country, then the currency

Let me put it in plain language. First you create a new country –in this case a Federal Europe– and then you create a currency. But instead, when the Euro Project was discussed, many believed that a pan-European currency would help expedite the achievement of a political union among key EU members.

Quite frankly, a bad idea. I am not suggesting that, because of Greece, the Euro is doomed. What I am suggesting however is that, by allowing under performing countries (and that includes Italy, Spain and Portugal) to join the Euro, the EU financial authorities created new problems.

No policy harmonization 

A common currency without a Federal Europe, that is without truly harmonized economic/tax/fiscal policies, created distortions. It should have been obvious that it is almost impossible to harmonize broad macro-economic policies among countries that have almost incompatible systems.

Northern Europe, (Scandinavian countries, Germany, The Netherlands, Austria, and a few others), on balance, is well-organized, fiscally responsible, innovative, and productive.

Southern Europe is not. Hence the discrepancies that were masked at first by the common currency, but then exploded when the Eurozone system came under severe stress after the 2008 financial crisis.

A problem, not a solution

In the end, this monetary union willed into place mostly for political reasons turned out to be a problem. Heavily indebted Southern European states had taken advantage of the Euro in order to borrow more at lower interest rates. Lenders trusted the Euro and so continued to finance profligacy. And so on, and so forth.

As we now know very well, Greece has become the extreme case. Greece is the worst performing Eurozone country. However, mostly for political reasons, it became an article of faith that Greece needed to be saved. It needed to be kept in the Euro. For a variety of reasons, the expulsion of a non performing, smallish country from a “sacrosanct” monetary union was deemed to be “impossible”.

What’s next? Not much 

And quite frankly, even today, with failed negotiations on debt restructuring coupled with reforms, the upcoming Greek referendum on a “Yes” or “No” to the EU package, and more, it is not at all clear that Greece has to leave the monetary union.

You see, the prevailing European instinct is to patch things up. Find an eleventh hour compromise. Save the status quo.  Maintain a semblance of order, even though all parties know that the unaddressed systemic problems fester under the surface.

Technocrats in charge

As indicated at the beginning, monetary union should have logically followed the implementation of a European Federation. A real federation would have been based on truly harmonized economic and fiscal policies among its members.

But the technocrats running Brussels really believed that the Euro would become the magic glue that would bind Europe together, no matter the glaring incompatibilities among systems that travel at different speed.

Italy just like Germany? 

Well, as it turned out, the Euro worked out fine for some members; but not for all. However, this late in the game, whatever will be done about Greece, I doubt that EU policy-makers have the stomach to address the serious imbalances that separate, for instance, Italy from Germany.

If anybody believed that, by virtue of using the same currency, Italy would eventually become more like Germany, it is obvious that this did not happen. And it should be clear to all that it will not happen.

 

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