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The existential danger to the euro is no longer a speculative attack, a bank run or the rise of extremist parties, but sheer exhaustion. Benoît Coeuré, a member of the ECB’s executive board, warned last week that the eurozone might suffer a Japanese-style lost decade [speech]. But at least Japan maintained near full employment. The eurozone faces a far worse prospect: a lost generation.
The political consequences of this scenario are the subject of an important book published in France by François Heisbourg, chairman of the International Institute for Strategic Studies and the Geneva Centre for Security. In La Fin du Rêve Européen, he says the situation has become so intractable that the only way to save the EU is to abandon the euro.
The author, who is as pro-European as they come, fears the eurozone crisis could destroy the EU – a project he regards as far more worthwhile than the dysfunctional monetary union. He says a UK exit from the EU could act as a potential trigger for its dismantlement. I do not share his conclusion but his analysis is spot-on. The EU, with its legal treaties and its step-by-step crisis-resolution tactics, is not compatible with a functioning monetary union in the long run.
The core of Prof Heisbourg’s argument is that we are stuck in a vicious circle. Electorates blame Europe for the crisis, and are unwilling to transfer more powers to the centre. Yet such a transfer would be necessary to solve the crisis. This is all true but I disagree that a decision to abandon the euro would solve the problem. Even if a dissolution of the euro were well managed, which it may be, I think Prof Heisbourg underestimates the economic and financial chaos it would create – not just in Europe.
I am also sceptical about his enthusiasm for a euro-free EU. Without the single currency, the EU would be a pretty dull place, which it was not in 1998. The common foreign and security policy is going nowhere. Without a single currency, the EU would roll back the single market. And, with only so many countries left to accede, the enlargement process cannot go on indefinitely. Whatever may drive the UK to remain in the EU or to quit is probably not related to the euro.
Of the options pursued and under discussion, I believe two are unrealistic. One is the attempt to solve the crisis through communication policy – which is what we are doing now, with a Banking Union that excludes any form of joint liability, or with endless protestations that the crisis is over or that the eurozone is recovering. The second set of unrealistic options, I fear, would be to go back to 1998 and start again.
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