Jasper Blom: “Now is the opportunity to take a left turn” The euro, the pinnacle of European monetary integration, has been under a lot of strain in recent years. How did the monetary union come about? How did it end up in a crisis? And how can we resolve it? To address these questions, Jasper Blom outlines the history and the future perspectives of the euro. In a series of six lectures, Bureau de Helling, the Green European Foundation and the GroenLinks working group on Europe are delving “Deeper into Europe”. In this second lecture, Jasper Blom, former policy adviser at the European Central Bank and now the director of Bureau de Helling, gave his audience his insights on the history and the future of the euro.
In the previous lecture, Kathelijne Buitenweg spoke of her love for the muddle that is Europe. Blom is less charmed: “In the case of the euro, we may indeed conclude that Europe is in a muddle. Personally I am less than enamoured of the mess that the euro has currently got itself into.” One thing that can not be made plain enough, in Blom’s view, is the true nature of the present crisis. “This is no euro crisis. It is a financial crisis and a solidarity crisis.” The logic of a currency union Why have a monetary union? The advantage of having your own currency is that the economy adapts more easily to changes in the business climate and it better absorbs the shock of shifts in the exchange rate. But maintaining your own currency has drawbacks in a trading partnership. They include transaction costs and the uncertainties and volatility of exchange rates. Besides, the symbolic value of sharing a common currency should not be overlooked. The economic literature warns, however, of some challenges a monetary union faces. The first challenge is to prevent a form of free-riding in which a member state can issue more debt without harming the stability of the currency – as long as its debt
is just a small part of the total. If all countries do the same, however, the stability of the currency is in peril. To forestall this practice, the Stability and Growth Pact (SGP) imposes strict limits on government deficits in the EU. A second challenge consists of what are known as asymmetric shocks. If a shock occurs in a specific part of the euro zone, the exchange rate is no longer available to buffer it. Business cycles which do not run synchronously constitute a third challenge. The European Central Bank sets the interest rate for the entire euro zone. If the countries cannot stay in step economically, the monetary policy will be too loose for some countries and too tight for others. Without a solution for that, there will be steeper economic peaks and valleys. The last, and maybe the most important, challenge is the “common destiny”. Member states need public support for their measures to counter the above challenges and to solve problems raised by moving towards a common currency. That is a problem in the eurozone today – a crisis of solidarity. History of monetary cooperation The first plans for a currency union were made back in 1969 under the leadership of Luxembourg’s Prime Minister Pierre Werner. With a timeframe of ten years, the Werner Plan proposed constraining the exchange rates of European Economic Community member countries within a narrow bandwidth of 4.5 percent, coordinating economic policies and facilitating capital mobility (the making of cross border investments). European currencies would thus no longer be pegged solely to the US Dollar and hence to gold, but also to one another. But the Werner plan was doomed when America abandoned the gold standard, triggering a sharp hike in the volatility of the international monetary system. Only a few of the smaller countries, among them the Netherlands, were able to peg their currencies to the Deutsche Mark. In 1978, following the collapse of the Werner Plan, new efforts were made to establish the European Monetary System (the EMS). This was a system of fixed exchange rates with regard to the European Currency Unit (the ECU). This was an important step towards a mature Europe no longer fixated on the Dollar. It will be clear from this historical account that the Netherlands enjoyed de facto monetary sovereignty for only a few years after World War II. Bretton Woods tied the Dutch Guilder to the US Dollar, and soon after that it was pegged to the Deutsche Mark. The further integration of the European Union gave new momentum to the idea of a fully shared currency. The Delors Commission issued a blueprint for the European Monetary Union (EMU) in 1989, and the EU member states adopted it as part of the Maastricht Treaty in 1992. Its basic criteria for public finances and for monetary
Jasper Blom: Now is the Opportunity to take a Left Turn
stability were intended to assure convergence of the European economies and prevent later free riding. The Stability and Growth Pact criteria included a budget deficit limit of 3% of GDP, and a debt ratio not exceeding 60% of GDP. Capital movements were to be completely liberalised, and eventually a common currency was to be launched under management of the European Central Bank. The euro was implemented for electronic transfers in 1999, and the new currency became a physical reality in 2002. The Eurozone in crisis and the European political response In 2008, the financial crisis began spreading from the US and across Europe. Greece, Ireland, Portugal, Spain and Cyprus were hit particularly hard. “There wasn’t a structural problem with public financing,” argued Blom. “Things weren’t going too badly for most EU countries, apart from Greece, before the crisis. In 2007, Ireland had a debt ratio of only 25% and a surplus on its budget. Irish public finances went awry because of the cost of bailing out the banks.” In other words, the cause of the euro crisis lies in the financial sector; it is a financial crisis. In June 2012, the “four presidents” (Van Rompuy of the European Council, Draghi of the European Central Bank, Barosso of the European Commission and Juncker of the Eurogroup) presented an agenda to guide European policymakers in tackling the euro crisis. The agenda had four points: (i) integrated financial framework; (ii) integrated budgetary framework; (iii) integrated economic policy framework; and (iv) democratic legitimacy and accountability. The integrated financial framework was a reaction to the vicious circle that developed between the banking crises and the debt crises of the eurozone member states: if it became necessary to rescue large banks, the countries concerned could no longer satisfy the SGP criteria, so generating a crisis on the capital markets. The proposed solution, the first pillar of a future Banking Union, is a European funding pool (financed by the banks themselves). It is not however a European fund. The pool consists of national funds which when necessary can act as mutual guarantors. The problem of the vicious circle of government debt and bank debt is not in itself resolved by this measure, which is disappointing in Blom’s view. The second pillar of the Banking Union is supervision: large banks henceforth fall under supervision of the ECB, because national supervisors are sometimes too chummy with the banks. The third pillar of the Banking Union is the joint rescue of collapsing banks. When this happens, the shareholders and senior creditors must be the first to absorb the losses – the “bailing in” approach first applied in Cyprus. In the worst case there is still a European allocation worth 60 billion euros. This may sound like a lot, but the Netherlands alone has already
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received 33.5 billion euros in capital injections. The second and third agenda items were the integrated budgetary framework and the integrated economic policy framework. Their purpose was principally to alleviate the free riding problem, but they also supported greater convergence. They ended up as part of the European Semester for the coordination of budgetary and economic policy. Mark Rutte (Dutch Prime-Minister) has to send his ideas to Brussels so that the European Commission can offer guidance, before the national parliament has made its decision. The Stability and Growth Pact has been tightened up with a range of modifications. A positive change was the Macroeconomic Imbalance Procedure. Not only countries with large trade deficits have to take action on these, but also those with trade surpluses. The procedure is however applied asymmetrically: deficit countries are dealt with sooner than surplus countries. “That is not really in the spirit of solidarity,” Blom believes. The final agenda item is democratic accountability and legitimacy. “In this case it’s clear that the four presidents were primarily concerned with financial and economic policy. Reading between the lines, the other three items are backed by some very exciting proposals. In comparison, this item is a ‘must’ unaccompanied by any really concrete proposals.” The future of the euro The approach currently taken by European policymakers does little to solve the “common destiny” problem. There are still too many deficits which are cut, in search of budgetary discipline, without regard to social variables. “We shouldn’t tolerate youth unemployment levels in some countries being over 50 percent,” Blom argues. “Until we are willing to recognise that the Greek, Irish and Spanish debts are due to our own banks and pension funds, that the deficits on their current accounts are our own surpluses, and that we give them sporadic loans which are bound to stringent conditions for draconic reforms without ourselves being prepared to conduct an economic policy that will help the situation, I definitely see problems for the sustainability of the euro.” Why, for example, hasn’t a shock absorption fund been established to deal with the problem of disparate business cycles? Eurozone countries would deposit money into the fund when things are going well, so that it can be paid out to countries that are not doing so well. That’s the only way we can work towards a solidary currency union. The lack of solidarity is the biggest deficiency of the EMU and of the current European crisis measures. “The
Jasper Blom: Now is the Opportunity to take a Left Turn
present economic institutions of Europe have a typically ‘right wing’ character” in Blom’s opinion. “They set strict rules for deficits but few for social matters. GroenLinks has voiced its criticism of that bias from the outset. The crisis of finance and solidarity in Europe compels us to do something about it. We now have a chance to include the social and environmental criteria we want. This is an opportunity to use the currency union as a way to take a left turn.”
This article was written by Simon Otjes and translated into English by Vic Joseph. © Green European Foundation & Bureau de Helling, January 2014
The views expressed in this article are those of the authors’ alone. They do not necessarily reflect the views of the Green European Foundation. With support of the European Parliament.
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