Lorenzo Bini Smaghi said he is "not pessimistic" about the long-term future of the euro, but warned that European authorities' "inefficient" habit of reacting to rather than anticipating market pressures would lead to "a lot of volatility in the short term".
In an impassioned defence of the single currency at the 6th DWS European Investment Conference in Rome, Bini Smaghi took aim at apocalyptic comment around the eurozone crisis, saying that it draws strength from the political project of European integration, but was also a genuine response to the economic needs of the single market.
Bini Smaghi conceded that Europe was never an optimal single currency area, but pointed out that having 17 different free-floating currencies was not optimal, either. Switzerland's response to the crisis has been to peg its currency to the euro, he observed – hardly a ringing endorsement for the stability of staying out of the single currency. Bini Smaghi also noted that the US financial system was not created perfect: the Federal Reserve was formed in response to multiple banking crises.
He also pointed to progress that has been made. It would have been inconceivable two years ago that Germany would vote to lend to Greece and support a new fiscal treaty, he suggested. The answer lies in the reactive approach of Europe's authorities. But in a way this is unavoidable, Bini Smaghi argued. The solution is simple on paper: a eurobond that creates joint-and-several liability. But that is unrealistic because of the moral hazard it would entail. The dangers have been demonstrated over the past winter, when complacency after fiscal agreements and the ECB's LTRO led to privatisation and structural reforms being watered down.
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