11 June 2013

Paul N Goldschmidt: "Euro exit"?

The many reactions to my May 29th article concerning a German exit from EMU require further developments. The debate surrounding this burning question elicits political postures which are totally irresponsible and/or unrealistic, in particular in France. In addition to the outright opposition of the extremist National Front (Marine le Pen) and the Front of the Left (Mélanchon) the controversy is also splitting the UMP on the right and the Socialists on the left.

This state of affairs is highly dangerous and demands that citizens should have access to a timely, sober and objective assessment of the true stakes involved. Indeed, the wantonness with which some so-called responsible political grandees promote the abandonment of the single currency is stupefying and completely overlooks the inevitable consequences of such a move.

The confusion has reached the highest echelons of the State: President Hollande, during his press conference of May 16th, called for an “economic government” of the eurozone, endowed with an independent budget leading, in fine, to the issuance of “eurobonds” while, a few days later, he rebukes unceremoniously the Commission for daring to issue recommendations on structural reforms (as a quid pro quo for a two year grace period to meet budgetary undertakings) wholly in keeping with the exercise of its  legitimate mandate. In addition, one hears within the socialist party such crazy proposals (totally unmanageable) as making the ECB accountable to eurozone National Parliaments when it should be obvious that this role should be devolved, after suitable reforms are in place, to the European Parliament.

A first unjustified amalgam, carefully nurtured by extremist parties, is to ascribe responsibility for the financial crisis and the ensuing austerity to the single currency and to pretend that the solution lies in “euro exit”! If it is undoubtedly true that errors were committed, in particular by not pursuing the completion of EMU in the immediate aftermath of the introduction of the single currency in 1999, it is also indisputable that the eurozone has proved to be an efficient protective barrier for its Members – as well as for the EU in general – in the face of the spreading of the crisis. Without the euro, EU Members would have had recourse, as in the past to competitive devaluations, undermining the fundamentals of the “single market” of which even the United Kingdom is a fierce proponent.

Within this context, it is worth pointing out the implicit contradiction in Mrs Le Pen’s reasoning: indeed, if, as she purports, the euro is too strong, then it behoves the eurozone to agree on a foreign exchange policy which, in tandem with a compatible monetary policy implemented by the ECB, would aim at weakening the currency; in order to achieve this goal it is necessary to further strengthen economic cohesion within EMU. This solution is, of course, totally incompatible with a French exit from the euro which would lead to the implosion of EMU and a return to a chaotic “free for all”. Mrs. Le Pen (together with other currency pyromaniacs) must therefore nail clearly her colours to the mast and decide whether she favours reinforcing the eurozone so as to engineer a foreign exchange policy capable of defending European interests (stance that would justify the parallel she draws with Japan) or, alternatively, whether recovering French monetary sovereignty is the priority which would imply an unilateral devaluation, apparently assumed, but catastrophic for the population’s purchasing power.

It is, however, this latter option that appears to prevail and it behoves its proponents to assume the consequences fully. If the 1930 crisis is too remote to elicit a coherent reaction  from  the public when compared to the current situation, it might be appropriate to recall another more recent crisis of equal amplitude which is still fresh in our memories: the implosion of the Soviet Union and of its associated common market, the “Comecon”. One should indeed recall that each and every country implicated in the process were hit by a severe and immediate fall in living standards before progressively (and to varying degrees) climbing back up the “growth ladder”, helped, in many instances, by joining the EU.

The implosion of EMU (and consequently of the EU) would inevitably have similar disastrous effects for all Europeans which, in addition, would have to face a prolonged period of exchange controls, reminiscent of post World War II years, in order to contain capital flight. While in the case of the implosion of the communist world, the sacrifices required found some compensation in the expected significant improvements in terms of freedom and human rights, no such incentive will be on the horizon for EU citizens. Quite to the contrary, a reduction in purchasing power and other inevitable restrictions are likely to create diametrically opposite effects, exacerbating social conflict and leading to dictatorial political regimes; the latter will lead to the loss of most of the economic, social and political progress that European citizens, abusively, take for granted and which constitute today the hallmark of the EU’s envied achievements.

It is the truth of this “disenchanting” future that must be presented to the Europeans as the alternative to pursuing the deepening of 60 years of European integration. There can be no doubt that reviving the attraction of European construction involves painful sacrifices, including further transfers of national sovereignty which will be fiercely contested by the national-populist and eurosceptic battalions. Nevertheless, the preservation of European values and the achievements of its social model can only be guaranteed at EU level; solidarity among European citizens requires accepting, in exchange for additional shared rights, the corresponding shared obligations.

That is why the European elections next June will have such a crucial importance for the future of the Union. Indeed, there will be a strong temptation to convince the elector that he can, without fear of adverse consequences, use his vote to protest with impunity against the shortcomings of the Union by supporting the “eurosceptic” platforms. In light of the increased powers of the EP granted by the Lisbon treaty, such an outcome would result in the total paralysis of the EU. Exit from the economic crisis would be further delayed increasing the chances of the implosion of the euro and the verification of its consequences as outlined here above. One should also not overlook the possibility that, if such a result became likely, markets would accelerate the process and create ahead of the vote a new financial crisis, the magnitude of which would quickly run out of control.

The time for yet further compromises is now over. Either the European citizen will be persuaded that his selfish interests as well as those of future generations are best insured by further EU integration with its challenges and difficulties but also carrying the hopes of better times, or else he should prepare himself to endure a long-term and irreversible impoverishment and contemplate the end of the attraction of the European civilisation.

Paul N Goldschmidt, Director, European Commission (ret); Member of the Advisory Board of the Thomas More Institute

Tel: +32 (02) 6475310 / +33 (04) 94732015 / Mob: +32 (0497) 549259

E-mail: paul.goldschmidt@skynet.be / Web: www.paulngoldschmidt.eu

© Paul Goldschmidt