The Euro: Halfway Full
“The euro is Europe”
At this year’s World Economic Forum in Davos, French President Nicolas Sarkozy made the following pronouncement, using the pronoun WE to make his point:
“We will never let the euro fall… You have to understand, the euro is Europe. And Europe is sixty years of peace. We will never allow the euro to be destroyed.”
The French president claimed that he was speaking also on behalf of Chancellor Merkel, who will have her platform later in the Davos program. Based on her recent statements regarding the euro, we can expect no less of an emphatic defense of the euro, if perhaps with somewhat less theatrics in the delivery.
In her New Year’s address to the nation, Merkel said, “The euro is far more than a currency… Fortunately, we Europeans are unified. A unified Europe is the guarantor for our peace and freedom. The euro forms the basis of our prosperity.”
Generating Support at Home
Clearly the two leaders are singing from the same songbook to various audiences, even if there is the occasional note of dissidence in deciding how best to move forward with managing the euro system. Whereas Sarkozy frames his argument in grand historical review, Merkel placed her emphasis in speaking to her fellow Germans on the euro as a key to Germany’s economic success. The fact is that some polls show that half of Germans would want to have the D-Mark back in light of the measures being taken to save the economic situations of many euro zone countries. That Germany has come out of the last two years in very good shape – exports booming and unemployment lower than in the last two decades – does not seem to have registered with many Germans as a way of seeing the euro as good thing.
But it cannot be denied that the bailouts have revealed some serious structural flaws in the euro framework.
When the euro was born within the Maastricht Treaty in 1992 there was a clear signal that no country would be eligible for a bailout. The goal was to avoid rewarding bad fiscal behavior and endangering the overall euro framework. The so-called Stability and Growth Pact went further to mandate that euro zone nations maintain budget deficits as percentages of GDP below 3 percent and debts as percentages of GDP below 60 percent. Many countries did not abide by that mandate during the following years; the lack of an enforcement tool exposed another congenital problem with the euro.
Solving the North/South Split
The current crisis has demonstrated the difficulty of finding a common approach to monetary and fiscal policy on a continent with huge economic asymmetries. Whereas some southern European countries are confronted with high unemployment rates, some northern European countries are working to keep their economies from heating up. Managing such divergences remains a major challenge for the euro system, and has been a source of a lot of tension within the euro zone [see Stefan Theil’s Newsweek essay].
Yet there’s too much vested in the system – financially, politically – at multiple levels for Europe to consider abandoning it. Without the political support each member nation needs at home, however, leaders at the European Central Bank in Frankfurt or in the EU in Brussels will find it increasingly difficult to find viable solutions for these trouble areas.
Given the dominant role Germany has played in the euro zone system from the beginning – as well as the value it has been able to extract from it – there is no surprise that Chancellor Merkel has been very vocal about the need to make progress in fixing the problems. At a recent national party convention, Merkel proclaimed: “if the euro fails, not only the currency fails. Europe fails too, and the idea of European unification. This test is existential – it must be passed.” In Paris, too, the need to buttress the euro is a given and Sarkozy has moved decisively toward Merkel’s push for more sanctions to enforce budget discipline. While her slow reaction to the crisis in Greece and some unilateral decisions to deal with speculative trading caused consternation around Europe, she has set the tone for dealing with not only the budgetary discipline and steps needed to resolve them, but also addressing the need to come to grips with the outstanding fiscal governance issues in the euro zone.
Germany and France are clearly taking the lead on this, which is understandable for the two largest economies in the euro zone. Germany’s clout is going to be dominant but it will still be necessary for Merkel to maintain the message outside of Germany that the euro is not good for only one country but for the whole of Europe – and inside Germany that the euro has been very good for Germany. Looking at serious dips in her party’s polling and the more dramatic dips of her coalition partner, the FDP, Chancellor Merkel will be challenged to confront skeptical Germans about the future of the euro that bailing out weaker countries will be to their benefit in the longer run. With several key state elections scheduled for 2011, and the CDU/CSU and FDP weakening in the polls, the next months are not going to be easy ones. As for Sarkozy, he does not face a reelection bid until the spring of 2012, but how the coming year unfolds for France will set the stage for his campaign. With an unemployment rate of over 9 percent and political backlash always at the ready when efforts to curtail benefits or increasing retirement age levels are proposed, the French President will also have his hands full in maintaining domestic support.
The European Union suffers from a sluggish process in reaching a consensus on just about everything; in that the euro zone has a common characteristic. But both face a similar problem. Europe has built up an impressive monetary framework in which there is some degree of centralized power over currency, yet there remains the next step of political supranational rule-making. That is still a work in progress, even if the Lisbon Treaty was a step in that direction. However, as David Marsh has put it in his book The Euro:
“the trappings and symbols of nationhood – governments, prime ministers, armies, police forces, parliaments, tax agencies, law courts, football teams… TV stations, and newspaper groups – continue, more or less unchanged, as thoroughly national institutions… In spite of EU efforts at greater harmonization, governments’ behavior shows divergence in areas ranging from budgetary policies to support for industry. Under pressure from public opinion, governments wish to retain maximum hold over areas of decision-making where they maintain vestiges of control.
The euro has clearly led to much value added for many constituencies over the past decade and the profits can be measured accordingly in the business world. Yet it seems that the euro has not been equated with increased popular support for more Europe-wide initiatives. In times of economic and political uncertainty, a tendency to revert to nationalized thinking is not surprising. How Chancellor Merkel and President Sarkozy (along with their other European partners) will attempt to write the unfinished story of the euro remains to be seen.
Sticking With an Impressive Financial Accomplishment
For most of the last sixty years, the concept of Europe was a symbol of overcoming the past and building a new framework for the future. Since it has come into existence, the euro represents one of the most impressive financial accomplishments In history, and over 300 million Europeans use the euro every day. Still, during its first decade, the euro has become associated with economic constraints, budgetary problems, and now painful fiscal reform. There is no guarantee that the euro will enjoy a second decade. But if it does, more Europeans are going to need to know why and how the euro is, as Chancellor Merkel has said, more than just a currency.
Whether than can be done with references to a grand European vision or by showing how the euro makes a difference in people’s lives is a question political leaders need to ask themselves. For many Germans during the past sixty years, the D-Mark was a rock of stability on which they literally could bank their futures. Whether the euro will ever serve that same role remains to be seen.
This essay appeared in the January 27, 2011, AICGS Advisor.