There was a time that ‘Europe’ occupied a little spot in the middle of the newspapers. How this has changed in the last few decades! Now, ‘Europe’ is almost everywhere. Whether it is monetary policies, public debt policies or trade policies, Europe is involved. Even economic growth is nowadays considered to be a European rather than a national issue. I cannot think of a better theme to start my work as a columnist of Rostra Economica.
Despite the increased significance of European policies, they are heavily debated. Or should I say because of the increased significance? On growth policies: will the amounts that the EU aims to invest be sufficiently large to really boost economic growth? On trade policies: will the TTIP agreements that Europe and the US are discussing really increase trade or only shift it away from the countries that are not involved in the negotiations? On public debt policies: should European countries continue to reduce public debt levels in order to make their economies less vulnerable to crises like the current one? Or should they rather increase their debt levels and attempt to fuel the engine of economic growth? On monetary policies: will quantitative easing succeed in boosting the EU economy or will it turn out to be ineffective or, even worse, reduce fiscal discipline? And what will be the effect of this on the euro: will countries continue to support the euro?
A monetary union is unstable by nature
The euro. At this moment, the debate focuses on the Greek case and the possibility of a Grexit. But the issue is broader. It was only a few years ago that people were openly discussing the exit of countries from the EMU. Last year we found out that the Dutch Ministry of Finance had started making preparations to reintroduce the Dutch guilder again, should this turn out necessary. And this should not be surprising. A monetary union is unstable by nature; from time to time, there will be discussion about its survival. Surely, the EMU has more than succeeded in bringing down inflation to low levels and has proven to be an anchor of financial stability when the world turned into crisis. Think what would have happened in 2007 and 2008 had Europe still had the Dutch guilder, the German deutsche mark, the French franc and the Italian lira? An even greater chaos on financial markets than we have actually seen would not have surprised me.
The other side of the coin is the difference in economic performance between Eurozone member states. At the moment, it would be of great help to Southern European countries if they could devalue their currency which is inherently impossible in a monetary union. In theory, this counterargument has little relevance. As the argument goes, flexible markets for labour and products can achieve the same thing as flexible exchange rates, so nothing is really lost by having a common currency. But in practice, the adjustment of prices on labour and product markets can take many years. Currently, it may even take much longer due to the complete lack of inflation for some years.
What Europe needs is economic growth
What Europe needs is economic growth. This would help to compensate for the absence of national monetary policies, not only directly, but also indirectly, through inflation. And what if economic growth does not reappear in the coming years? One possibility is that the discussion on EMU and the euro will be revived. And for the distant future, there are many scenarios one can think of, including an implosion of the euro. But should an implosion occur, it will very likely be a controlled one. For there would be much to lose from an uncontrolled implosion: chaos on financial markets and a further prolongation of the crisis. And the introduction of 19 national currencies; how bizarre!