The twilight of a European dream
United States President Donald Trump is threatening to impose economic sanctions against countries that he claims create unfair trade advantage to themselves by artificially depressing their currencies. His main targets are Germany, Japan and China.
An interesting argument is used in the case of Germany. The U.S. points out that as part of the eurozone, Germany uses a currency that is weak because European economies burdened with immense structural problems are also parties to the system. President Trump’s negative generalization puts Germany in a difficult position and may end up driving another nail into the euro’s coffin.
The common currency was a fantastic project for enhancing trade within the EU’s internal market. It was a real help for business. So why is the euro being questioned now? The often-heard argument is that for a common currency to work properly, common economic and fiscal policies needed to be in place. Before the euro, Europe’s weaker economies could remain competitive by devaluing their currencies. Now, this avenue is closed to eurozone members. However, this view is superficial and takes a short-term perspective.
The true problem with the euro is that from the onset it has been used as a political tool. Unprepared economies, such as Greece, were invited to join the currency club, ignoring the admission criteria. The internal market’s excessive regulations, meanwhile, did not allow these weaker economies to increase their productivity.
Worst of all, the ceiling on the governments’ budget deficits, set at a maximum of 3 percent of GDP in the Maastricht Treaty, was not respected. Public overspending and waste in most member states have led to the accumulation of vast loads of debt. Germany and France set a bad example by violating the deficit ceiling first.
The European Central Bank (ECB) has made this drama still worse when, disregarding its obligation to be independent of politics, it added fiscal measures, such as buying public debt, to its monetary policy toolbox. The real duty of the ECB was to protect the value of the currency.
The effect of the ECB’s policy of limitless purchases of sovereign bonds has been to delay desperately needed reforms in eurozone countries.
The Swiss National Bank again has a very hard time keeping the already overvalued Swiss franc from rising sharply against the euro
What is the picture now? The short-sighted policies of the last years have created a situation in which the superficial argument about the need for a common fiscal and economic policy gains more and more traction. The euro is now seen as undervalued in the case of Germany, helping further this exporting superpower, and overvalued for most southern European countries, including France.
The opportunity to make the common currency an agent for increased productivity and growth in the EU’s poorer areas has been wasted. Now, unfortunately, the embattled euro can be shored up either through a system of direct transfer payments, or a financing through the target system at the ECB. In the end, both systems amount to subsidies, mainly by Germany, to the southern European countries.
In this context, it is interesting to watch the currencies of the eurozone’s neighbors. The Swiss National Bank (SNB) again has a very hard time keeping the already overvalued Swiss franc from rising sharply against the euro. At a time when public trust in the euro is diminishing, the upward pressure on the Swiss franc has become powerful. Also, the Polish zloty has started to rise in the last few months, however slightly, against the euro. The Czech koruna remains aligned to the euro, per a policy by the country’s central bank. Keeping the koruna in lockstep with the weak euro might eventually prove expensive for the National Bank in Prague. The question is if the Swiss and Czech central banks will be able to continue their policies.
Switzerland faces a predicament. A Swiss franc rising sharply against the euro again would make Swiss exports unbearably expensive and likely ruin the country’s tourist industry. On the other side of the coin, the interventions of the SNB to support the euro heavily burden its balance sheet. Worse still, these interventions might now be considered by the U.S. as unfair in the context of trade. They aim, after all, at weakening the currency, which helps exports. This conceivably could trigger high import tariffs for Swiss goods and services by the U.S.
The crisis-driven, rules-breaking policy of the ECB and the irresponsible fiscal practices of many European governments together create a situation that is damaging for all spectrums of economy and society, not only in the eurozone.
This system will now create rising dissatisfaction with the euro, and a general malaise is haunting the eurozone.