Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Europe must seize the chance to fix the euro

Posted by hkarner - 4. Juni 2017

Date: 01-06-2017
Source: The Economist: Charlemagne

An improving economy and Emmanuel Macron’s election are an opportunity that may not come twice

PICK a note, any note. The bills of Europe’s single currency are adorned with handsome bridges, arches, vaults and aqueducts, testament to the glorious architectural history of the old continent. True, the constructions are a little lacking in character; the notes’ designers were told to depict generic examples rather than specific structures to avoid offending countries whose splendours might be overlooked. But they speak of strength, sturdiness and the confidence of what some used to believe might be the world’s next reserve currency.

The euro itself, though, remains a wobbly, half-built enterprise, desperately unprepared for the next shock. When Europe caught America’s flu after 2008, bond markets picked off the euro’s weakest members one by one. Greece, Portugal, Ireland and Spain were forced into bail-outs. Italy, the euro’s third largest economy, tottered. Emergency funds were created, the European Central Bank implied it would create unlimited quantities of cash if needed, and the euro limped on. Today, growth is picking up and unemployment falling. But no one believes that the euro, which lacks the political and fiscal institutions typical of a currency area, can remain half-built forever. Investors are uncertain of its future, and governments have piled on debt since the last crisis, shrinking the space available to respond to the next one.

The case for reform is well trodden. The creation of the euro in 1999 denied its members the option of restoring competitiveness by devaluing. Labour-market mobility and fiscal transfers, which smooth the effects of shocks in other currency areas, were limited by rules and by culture. Bail-outs and belt-tightening were the prescribed solution for governments hit by sudden capital stops, which annoyed everyone: creditors resented opening their wallets; debtors contracted an acute case of austerity fatigue. The currency turned from an instrument of convergence between countries to a wedge driving them apart. Just compare Germany’s unemployment rate with Greece’s.

All this created a legacy of mistrust that haunts the euro zone today. That helps explain why, despite this litany of woes, conversations about euro-zone reform have gone nowhere. Indebted countries like Italy have grown addicted to the ECB’s cheap money, ignoring pleas from Mario Draghi, the bank’s president, to use the time he has bought them to reinvent their economies. Hardliners like Germany are more convinced than ever of the need for strict rules on spending and structural reform. Anxious officials wonder where the political impetus for a debate on the euro’s future might come from.

The election of Emmanuel Macron as president of France provides one answer. Mr Macron campaigned on a promise to deepen integration in the 19-member currency area, adding a common finance minister, parliament and budget. If such ideas are hardly original, they have resonated more than usual thanks to Mr Macron’s talent for soothing nerves. He has promised Germany that it will not have to help cover other countries’ old obligations, or to permanently fund their budgets. Officials speak of a window of opportunity for reform after Germany’s election in September.

This fertile soil has already begun to yield fruit. A new “reflection paper” on the euro’s future from the European Commission cautiously entertains such ideas as repackaging euro members’ bonds into joint securities (without asking countries to stand behind each other’s debts), and an unemployment-reinsurance fund to help treasuries cope with recessions. The euro-zone budget Mr Macron seeks could help countries manage when the next crisis strikes, by protecting public investment or covering the immediate costs of structural reforms with long-term benefits, such as changes to pension rules.

Grand ideas to reinvent the euro zone have traditionally run into the sands in Berlin, where suspicion that European deadbeats want to fund their profligacy with German money is sharper than ever. But some detect a shift. Many Eurocrats heard in Angela Merkel’s striking call for Europeans to take charge of their destiny an attempt to prepare voters for hard compromises to come. During Mr Macron’s post-election trip to Berlin last month the chancellor declared herself open to changing the EU treaty, which major euro-zone reforms would require.

But first things first. Bar some possible Franco-German initiatives on investment and tax rules, nothing much will happen on the economic front before Germany’s election. The make-up of its next government could be crucial; a coalition that includes the thrifty Free Democrats will be fiercer on euro reform than one with the Social Democrats. And while the brighter economic climate should make deal-making easier, the euro area has generally struggled to reform itself outside of crises, notes Sarah Carlson at Moody’s, a credit-rating agency.

A capital idea
If the euro area is capable of taking advantage of good conditions, best to build confidence slowly. Start with the incomplete banking union, which still lacks a common deposit-insurance scheme (thanks to German objections), and a backstop for its resolution fund. The much-vaunted capital-markets union, which aims to reduce European firms’ reliance on banks for finance, is only getting off the ground. Improving cross-border financial flows matters as much as the more contentious fiscal risk-sharing.

In time, that might open the way to the more radical changes Mr Macron seeks. They will require the sort of political courage for which the euro zone has never been known, but it could turn out to be less painful than some suspect: polls find record support for the single currency among voters, and a surprising appetite for reform. Like self-hating addicts, governments have shivered in the euro zone’s halfway house for too long, hooked up to Mr Draghi’s monetary medicine and convincing themselves that they deserve no better. It is time to move on.

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