Revisiting the Point of the Euro
As we approach 2013 it is apparent that the euro zone crisis will still be with us into next year. It has been festering since the beginning of 2010 and the current calm, in place thanks to Mario Draghi's clever supporting arrangements at the European Central Bank, is clearly only the "phony war" ahead of the next phase.
All the structural problems that the euro currency area is beset with now – predicted some years ago in a greatly prescient fashion by Professor Milton Friedman and Karl Otto Pohl, amongst others – will still be with us for some time to come unless and until the decision is made to enter into fiscal union alongside the unwieldy monetary one.
New Year is traditionally a time for reflection and introspection, so let's start now and revisit the question: What is the point of the euro? Indeed, what is the point of the European Union? Once you look past all the political fluff and the "ever closer union" objectives so beloved of Jacques Delors and his ilk, wasn't the overarching principal objective of both to bring member economies together? To trade as one, irrespective of national borders?
Thanks to the euro, that process is actually being reversed. Banks have pulled back from cross-border lending. They are minimizing their exposure to euro assets in the southern euro zone. EU economies themselves are diverging, not converging, to the point where northern euro zone countries are growing their GDP output while southern members are contracting and indeed imploding on themselves under the burden of their unsustainable debt. Just last week Cyprus became the fifth euro zone country to request a sovereign debt bailout.
In terms of competitiveness and productivity, EU members are also diverging. Trade flows across the EU have turned into a virtuous circle of ever-increasing surplus for some countries and deficits for others.
The paradox of the euro is that it has moved member economies further apart, not closer together. Its existence is creating precisely the opposite effect to what its proponents always stated would happen. EU taxpayers are suffering because of the unintended consequences of a completely artificial construct with no basis in sustainability.
Up to now, the debate has been about whether a country such as Greece can leave the euro, and what would happen as a result of such an event. But as the crisis rumbles from one year to the next, with no solution in sight and no evidence of intellectual debate amongst EU governments, it is clear that this is the wrong question. The issue to debate now is: Can we unwind the euro? What would happen if every country simply went back to its previous domestic currency? Let's forget the legal and treaty arguments. Let's stop debating how to make the euro long-term viable and instead ask ourselves: What's the point of the euro?
Because it clearly isn't achieving what it was intended to do, and it won't unless we have fiscal union. If we aren't going to have fiscal union, surely we should expend effort (and cost) looking at the pros and cons of unwinding the euro for everyone simultaneously. Otherwise we will expend effort and cost simply going down a gigantic black hole into oblivion.
Professor Moorad Choudhry is Treasurer, Corporate Banking Division, at The Royal Bank of Scotland.
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