25 years after Maastricht, the euro is worth rescuing
- In their quest for an ever-closer political union, European leaders established partially wrong criteria for the common currency area and the European Central Bank diverged from the focus on defending the euro’s value
- Despite it failings, the euro project is worth salvaging; a common currency can well serve Europe if only it is put on sound macroeconomic and political foundations
Europe is commemorating the inception of its common currency, the euro, a quarter of a century ago. The goal to establish it was set forth in the Maastricht Treaty, which was drafted in December 1991 and entered into force in 1993. The currency began its virtual existence in 1999, and euro bills and coins entered circulation in 2002. The anniversary is remembered, but not celebrated. The euro, created with great enthusiasm, is now widely perceived as a failure.
In fact, the common currency was introduced not only for valid economic and business reasons. There was a political agenda attached to the project as well – to push forward the process of European integration and unification.
In the Maastricht agreement, conditions were set to guarantee the stability of the new currency and to make certain that it would enhance economic growth within the European Union. The supranational European Central Bank (ECB) was supposed to act independently and stay focused on ensuring monetary stability. Another crucial Maastricht criterion was that member states were to avoid budget deficits of more than 3 percent of their gross domestic product (GDP), and accumulated public debts in excess of 60 percent of their GDP.
That was the plan. However, there was also the political agenda of the “ever-closer union” and the “harmonization” mania. This led to misconstrued risk premiums for loans. Also, the critically needed program for weaker regions to increase their productivity, and a transition period before they fully entered the common currency system, were neglected. Under national currencies, countries restored their competitiveness through currency devaluation; under the euro, this avenue was closed to them. This resulted in financial signals that were misguiding. Business in southern Europe turned en masse to construction, financed with – thanks to the euro – comparatively cheap debt.
Tall bill for mistakes
The consequences were dire. A much larger disaster, however, was brought about by disregard for the deficit criteria. These were immediately flaunted by the two largest members of the community, the supposed stability guarantors Germany and France. Other governments took their cue from them and breaking the deficit ceilings became common practice.
The list of sins was expanded further when the eurozone’s entrance criteria were diluted to accept countries such as Greece. It was clear from the onset that some countries in the EU did not meet the requirements and never would. They cheated the system while the ECB, the European Commission and other member states looked the other way. Greece was the most striking case, but a few other states were in the same category.
In the new eurozone, states happily spent and accumulated debt. Politicians eschewed reform under the protective shield of baseless triple-A ratings on their burgeoning sovereign debt. Such fictions can continue only to a point; in 2010 a severe fiscal crisis hit. In many instances, the euro was blamed. It was an easy scapegoat.
The present policy of the ECB, of low to negative interest rates and “quantitative easing” (which consists of increasing the money supply and buying financial assets especially sovereign debt from banks) represents a complete breach of the rules and criteria of the ECB. This policy not merely debases the currency, it also erodes the public’s remaining trust in European institutions and, in consequence, the European Union.
How to rescue the euro
A grave mistake of the past was that not all eurozone criteria were correct. The pursuit of the “ever-closer union” and “harmonization” caused the architects of the euro zone to ignore the large regional differences in the real economy and economic behavior. Making matters worse, the proper criteria were given short shrift by many member states and the European Commission. Now the ECB has joined in the destructive process.
As the cures for the assumed failure of the euro are promoted, they again turn up to be the harmonization and the ever-closer union. It is said that what Europe needs to salvage its common currency is a common economic policy – which is rather difficult to accept, as a currency should serve the economy, not vice versa. In this bubble, the very same assumptions which led to undermining the euro are presented as the tools of its rescue.
This is only a way of centralizing EU economies, nearly certainly making them more inefficient, and a script for arriving at a planned economy.
As a businessman, I appreciate the convenience of a common currency. It is hugely advantageous in trade inside the eurozone, as well as globally. As a means of exchange, saving and investment, the euro is beneficial to the entire European society and certainly worth maintaining. But this can work only if the political agenda, attached to the euro from the beginning, is dropped. A proper system requires a central bank committed to the value of the currency. It will also be necessary to allow some members of the eurozone to disengage in an orderly fashion and return to their national currencies.
The time is high for the technocrats to realize that Europe is successful in its rich, natural diversity, not in “harmonization” of an artificial, “ever-closer union.”