The search for a monetary European arrangement yielding sufficient monetary and political stability has preoccupied the EU for well over 40 years. Unstable exchange rates emerged as a big problem for the management of the EU's first transfer union, the Common Agricultural Policy. They were later rightly seen to pose a politically unmanageable threat to free trade within the EU's single market. This recognition gradually turned full monetary union into a central goal of European politics. Free trade, capital mobility, independent national monetary policies and stable exchange rates form an “inconsistent quartet”, as Tommaso Padoa Schioppa, a great European economist, famously put it.
The current euro-zone crisis is thus but the most dramatic iteration in a decades-old search for economic and political stability. As before, market unrest acts as both symptom and trigger. The cause has also remained the same. We want Europe to deliver stability but some of us refuse to concede it the necessary powers. We clamour for good truffle pasta when all we provide the chef with is cheap truffle oil.
Is splitting the euro into one currency for the haves and another for the have-nots a good way to tackle this dilemma? The sensible answer is no. First, institutionally dividing the EU into a first-class and second-class club amounts to throwing a time-bomb into the core of European integration. The internal market would be at risk if major producers (and not just the few left in Britain) compete within an economically integrated area while belonging to different currency zones with independent monetary policies. The alternative where the weaker club would slavishly adjust its policies to the stronger one's would be equally debilitating in political terms. Second, it is hard to imagine a more forceful European foreign policy flowing from a European framework where two significant currencies, one of them immensely stronger than the other, federate their respective members into strongly bound interest groups. Third, it is more than likely that such a restructuring of the EU would generate ongoing disruptions hurting the economic prospects of many in the semi-detached club of the rich.
The important question remains whether a one-size-fits-all monetary policy can work for a club of countries as diverse as that of the euro zone, today and tomorrow. Critics correctly point out that the first decade of the euro has ushered in deeply destabilising developments in countries such as Spain, Ireland and Greece. Clearly, most proponents of monetary union including this author seriously underestimated the effects of a steep fall in interest rates in euro-zone countries with a recent history of poverty. The resulting distortions were far larger than anticipated and governments and European institutions found themselves powerless to contain them. The rebalancing has now initiated a counter-shock inflicting massive social pain on the weakest euro-zone members and adds grist to the Eurosceptic mill.
It is, however, dishonest to contend that this is the normal state of euro-zone operations rather than the steep price to pay for a poorly forecast transition shock. As Jean-Claude Trichet has rightly argued, economic disparities are larger within America than within the euro zone—that goes for China and India too. What then? The answer is simple. The euro zone today lacks the institutional and political firepower to ensure that economic disparities will not one day rip it apart. The current crisis has forced member states to address this problem, but their attempts to do so remain almost certainly insufficient. Yet to argue that they can never succeed ignores the evidence of currency integration in other continents.
We must equip the euro zone with the tools for long-term survival—all other options are far worse. That means stronger instruments for crisis-fighting and for economic, fiscal and budgetary management in ordinary times. Some federal monies should act as automatic stabilisers, which means that some revenues and expenses should operate automatically and flexibly. National finance ministers and national parliaments must yield some powers. The euro zone must be given a political figure with the authority to speak credibly for all.
Ideally, all this should be achieved within a system granting just enough power to the federal centre and allowing the component parts to retain as much autonomy as possible. Such a model of “light federalism” is far less intrusive than the currently favoured rule-bound system of coercive co-ordination, where a centre lacking in resources of its own attempts to dictate policy to the member states. The collective wisdom of European leaders and citizens is not quite there yet. But given the threat of a refragmentation exposing Europe to the full might of an ascending China and the full impact of a declining America, there is reason to hope that Europe will once again rise above its own demons—after all, we have been rather good at it over the last 60 years.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.