15 April 2013

Hans-Olaf Henkel: Europe's procrustean nightmare

To escape the crisis, EU leaders must recognise the shortcomings of the eurozone's one-dimensional framework, and develop a system better suited to managing a multi-faceted monetary union...

Historical precedents indicate that forcing disparate nations and states to unite under a single idea – whether communism in the Soviet Union, socialism in Yugoslavia, or a shared currency in the eurozone – generates centrifugal forces that can trigger the union's collapse. A one-size-fits-all approach to integration is simply unsustainable.   

But the eurozone is not only replicating other unions' mistakes; it is repeating its own. While 25 of the EU's 27 governments agreed to the ‘fiscal compact', aimed at imposing fiscal discipline on Member States, there is no guarantee that governments will not violate the rules, just as they violated those established by the Maastricht treaty.   

Similarly, although the one-size-fits-all monetary policy contributed to Greece's excessive indebtedness, and to Spain's real-estate bubble, eurozone leaders have consistently sought to re-align interest rates, for example, by compelling holders of Greek debt to accept ‘haircuts' (write-downs on principal). But the impact is severely limited without external devaluation, which is impossible within a monetary union.   

While Greece's eurozone partners may be able to carry it for decades this way, and even to bail out Spain, the system would surely collapse under the weight of a larger economy. And such an economy – France – is in serious jeopardy...  

Europe's leaders must pursue a controlled segmentation of the eurozone, in which the most competitive countries – Austria, Finland, Germany and the Netherlands – adopt a new currency, the ‘northern euro'. This new monetary union would be managed according to the original Maastricht treaty, with a truly independent central bank responsible for regulating the northern euro's exchange rate against the euro, which less competitive countries would retain.   

The rump euro's weakened exchange rate would lead to renewed economic growth, job creation, and a stronger tax base in southern European countries. Initially, to facilitate debt reduction, bondholders would face another haircut. Countries departing for the northern euro should make a one-time contribution to these debt-reduction efforts. A flexible membership system would enable countries to join the northern euro when their economic and fiscal conditions became strong enough.   

Europe's leaders must stop treating the eurozone as a homogeneous entity, imposing one-size-fits-all policies on vastly different countries. The euro's framework should be adjusted to suit current fiscal and economic realities – not the other way around.

Full article (EV subscription required)

© European Voice