Časopis pro politiku a mezinárodní vztahy

Global Politics

Časopis pro politiku a mezinárodní vztahy

Is EURO doomed?

After several successful Symposiums on issues such as geopolitics, Middle East and the US foreign policy, the editorial board of Global Politics decided to prepare another edition. The new Symposium is focused on a very disputed topic of the economics of the European Union, more particularly on its common currency EURO.

For some time, we have been witnessing dramatic developments in Europe and it is no different at the time of writing of these words. Because there are serious decisions to be made in the Czech Republic and elsewhere in Europe, we think that it is neccessary to look at the issue at hand from a long-term perspective and assess the successes and failures of the single European currency. Moreover, the EURO has been supposedly an enduring project planned for generations to come, therefore we consider future development of the currency to be an important factor as well. Even though it is not possible to predict future, Global Politics is convinced that it is vital to look ahead and be prepared for possible challenges. Therefore, we asked experts also a question concerning their expectations of the future of the Euro zone. We are glad that we can present the opinions of number of important scholars and experts from the Czech Republic, Austria, Italy, Spain and the USA.

The questions we asked the respondents were:

  1. In time when the Euro is seemingly in crisis, can you name any achievements since its establishment? Are they overshadowed by the failures?
  2. What will the Euro zone look like in the year 2020? Who will be the winners and losers of the project at that time?

The respondents provided their answers during late May and early June 2012.

Joachim Becker

Vienna University of Economics and Business, Institute for International Economics and Development, professor

  1. The failures clearly overshadow any successes. The political construction of the euro zone has proved to be not viable. The economic structures of the euro zone member countries are very heterogeneous. Neither measures were taken to reduce the structural heterogeneity nor has the monetary union been complemented by a real fiscal union and a system of transfers between the member states. Though nominal convergence could be observed in many cases, structural divergence has been deepened. The arrangements of the monetary zone plus German policies of wage deflation have favoured German exports. In Southern Europe (but as well in France), the monetary zone has accelerated tendencies of de-industrialisation. The South European countries, particularly Greece, incurred increasing and, in the end, not sustainable deficits of the current account. In Southern Europe, growth was not based on industrial development, but on tourism, real estate and construction. It was debt-financed. The increase of debt, particularly private household debt, was facilitated by the decrease of interest rates after entering the euro zone. With the end of huge capital inflows, this growth model imploded.
  2. It is even difficult to predict what the euro zone will look like at the end of this year. The tensions in the euro zone are enormous. The dominant EU policies do not deal at all with key ingredients of the euro zone crisis like the German surplus of the current account (which mirrors the deficits of South European countries) and the weak productive structures in the peripheral euro zone countries. The austerity policies temporarily reduce the current account deficits, but they do not tackle their root problems, they exacerbate the debt problems and have unacceptably high social costs. Significant sections of the German political and economic establishment which is central to EU policy making seems to be inclined to squeeze Greece out of the euro zone. This thinking seems to be shared in other core EU countries like Netherlands. It seems that the partisans of this position tacitly acknowledge that present policies do not work and they are rather willing to accept the costs of a Greek exit of the euro zone (which might be significantly higher than they assume) than to continue to provide funds for Greece. It is rather unlikely that a Greek exit would not be followed by some other countries. It seems rather likely that we'll see a partial disintegration process.

Amar Bhide

Tufts University, The Fletcher School of Law and Diplomacy, Thomas Schmidheiny Professor

1) One should not expect much more of a currency than one expects of a system of weights and measures: uniformity and reliability across space and time. It’s a good thing that most nations use the metric system, that a meter in France is the same as a meter in the Czech republic and a meter tomorrow is the same as a meter today. The value of such standardization in coordinating human activity is almost, pardon the pun, immeasurable. So it is with a currency: the more widely it is used and the more it keeps its value over time the better it is. By this standard the euro has worked marvellously well. It has held its value and it is widely accepted. The populace wants to keep it, even in countries like Greece. The problem with the euro derives from the unfortunate expectation that it would somehow make all countries equally creditworthy. This was unfortunately believed by the markets and allowed governments to rack up huge debts and deficits. Now the debts can’t be repaid and ongoing state expenditures are way beyond tax capacities. So the temptation to quit the euro and cover spending with home-printed currency is almost irresistible.

2) I never make predictions – not for the next six months, much less for the next eight years.

Lukáš Kovanda

University of Economics, Prague, assistant professor, director of Prague Twenty

1) I think the euro has contributed significantly to intensification of the member states' trade flows. Its introduction has also led to a reduced rate of inflation in the euro states. However, I am afraid these achievements are overshadowed by the fact the member countries, once they have entered the single currency area, lost autonomy over their monetary policy. I hold the fact that key interest rates have been set up in Frankfurt for all the member states since the euro inception has turned out to be a major problem for the euro area and has been a pivotal cause of the current economical malaise in Europe.

2) It is a really difficult question to answer. There are about three basic scenarios of future development in the euro zone. First, the euro zone will stay in its current form, even with Greece. It should be noted, however, that this development is going to be very costly and will be increasingly opposed by those politicians who will get elected by voters unsatisfied with the current state of affairs in Europe. According to the second scenario, Greece and maybe a few other problem countries such as Portugal will exit the euro area, return to its national currency devaluing it significantly afterwards and make an effort to get back on the track, probably with a quite large stimulus provided by European Central Bank or/and International Monetary Fund. In the third scenario, the euro zone will be divided into “North” and “South” part, with Germany being the leader of the “North”. Crucial question under this scenario would be related to the position of France. Should France be in the “South” part, unlike Germany, the key idea behind the single currency, to unify two big European continental powers by one currency, would be largely rejected.

Zdeněk Kudrna

University of Vienna, Institute for European Integration Research, researcher

1) The costs and benefits of Euro or any other system of fixed exchange rates are conceptually well known. Single currency makes adjustments to economic shocks which impact different parts of the union, more difficult. Countries cannot devalue, hence they need fiscal support and labor mobility to adapt. This was always a big risk behind Euro zone, which lacks the institutional and political infrastructure to support such adaptations. The benefits of single currency are individually small but cummulatively large. They concentrate on the micro level as firms no longer have to think about currency risks and to seek expensive and complicated financial hedging. Managers and shoppers can save a lot of money and mental energy when prices are easily comparable and do not change every second. This allows for tighter economic integration across borders and new efficiencies of scale. It is easy to forget the everyday benefits of Euro during the crisis but they are still there.

2) The current crisis is a ‚make it or break it‘ event for the Euro zone and the EU. Chaotic disintegration of Euro is likely to wipe out decades of achievements of the integration. We could say goodbye to taken-for-granted freedoms of movement of people (Schengen), capital or (financial) services and – in case of return to competitive devaluations – even the freedom to trade goods could be curtailed. With so much of the infrastructure of the post-war prosperity crippled, we would have to ask whether we could still asume that intra- or inter-state violence in Europe is unthinkable. On the other hand, what does not kill us, strenghtens us. Hence, I assume that by 2020 the EU will be out of uncertain times, with more robust institutional and economic infrastructure and seeking more democratic legitimacy. After all, the EU has half a century track record of narrowly escaping existential crises.

Lubor Lacina

Mendel University in Brno, head of the Department of Finance, associate professor

1) Since January 1999 the Euro zone was enlarged from 11 countries to recent 17 countries. It is worth to mention that for example Estonia decided to enter the Euro zone even in the midst of the crisis.Other Baltic countries are ready to do so as soon as possible, even though the eurozone crisis is escalating over time and the whole project is under heavy criticism. If we look at the macroeconomic data, the first decade of its existence was quite a success. If we use the US as a benchmark, the Euro zone performed comparably with the US economy. However, since the beginning strong imbalances in terms of competitiveness and inflation were observed among the individual member countries. The euro also became the second world currency behind USD. But the biggest expectation was not fulfilled. The euro did not bring faster and more robust economic growth. Quite the opposite happened. The financial crisis neglected economic problems of individual member countries and led to significant losses in terms of GDP. Unemployment in problematic countries exceeded 20% (Greece, Spain), already four countries had to search external financial aid from the EU, IMF and ECB. The inability of the EU react to problems of Greece and following domino effect on other peripheral Euro zone countries fully overshadowed successes achieved since its establishment.

2) There are three basic scenarios. The optimistic one supposes that the Euro zone will overcome the recent crisis and the enlargement will continue until all the EU member countries including the Czech Republic will accept euro as common currency. In this scenario the EU will with high probability move towards a highest stage of integration – political union – and with a significantly higher budget at the EU level will head towards a fully federal structure. The EU will become one of the global leaders in economic terms and euro will become an alternative to USD. The second scenario is more pessimistic. The Greece and other countries will be forced from the Euro zone structure and the contagion effect will lead to a long term recession of the Euro zone and the process of disintegration of the EU as a whole. The realistic scenario calculates with the pragmatism of politicians in the Euro zone and the EU member countries. In such a situation some countries will decide to leave the Euro zone (Greece, Portugal, Spain, Italy), other countries with Germany in the central position of an economic leader will continue in deeper political integration. The countries staying outside will keep most advantages from participation in the single market – free movement of goods, services, capitals and labour – and will either stay outside the EU with the status similar to Switzerland or Norway or will receive the status of candidate countries like Turkey or Serbia and will join the EU later when their economic situations improve.

Evi Pappa

European University Institute, Florence, associate professor

1) The European project is a great one and I can only see successes associated with it. The creation of the euro has enabled many economies of the periphery to borrow at low interest rates promoting investment and growth in many countries. Take for example Spain, which before the great depression was growing with the incredible rhythm of 6% per year. The European funds have helped developing infrastructure in many less advantageous European countries- Spain, Portugal and Greece. Europe is a union of transfers and solidarity that should not be shaken by a temporary negative shock.

2) Europe is going to be a winner as a whole if its people and politicians realize that this crisis can serve as a great chance to modernize the countries in Europe, which were mistakenly left regressed, like Greece, for example, and make them more competitive. I envision a stronger Europe and regional convergence.

Zdeněk Sychra

Masaryk University, Faculty of Social Studies, assistant professor

1) Certainly there are successes here. The euro has become a global reserve currency, which was not certain at all before the currency´s launch. Secondarily, the single market has been strengthened, the competition within the euro area has increased, it is a plus for consumers, transaction costs have disappeared, monetary instability in some countries has vanished too. Yes, all this is overshadowed by the crisis. But this is, on the other hand, an opportunity to move the project further and eliminate its weak points, although it is extremely difficult.

2) Anyone who claims to know the answer is just guessing. In the context of the turbulent events of the past two years, the year 2020 is far away. Everyone will lose, in that the crisis is fair. The Southern wing will have to sort out their problems and go through painful reforms, some – like Greece –will probably leave the project, the Northern wing will have to write off some debts and it will have to put up with fiscal transfers and the weakening of the public confidence regarding the EU. In the EU, solidarity has reached its limits, which weakens the whole integration process. If anyone comes stronger out of it, it will be Germany as an economic and today also a political leader of the EU and perhaps the United Kingdom, which will benefit economically.

Libor Žídek

Masaryk University, Faculty of Economics and Administration, associate professor

1) The very establishment of the Euro can be seen as a kind of achievement. The Euro has probably helped to integrate business and has increased competition among companies of the member states. For example, Czech companies with ties to the Euro zone constantly and strongly lobby for the Euro – it means (in my view) that it would bring them benefits.On the other hand, there has not been any increase in internal trade after the formation of the Euro. The benefits are difficult to estimate especially because it is foremost a political project. I think that whether the economic cons overshadow the pros depends on the length and depth of the contemporary crisis.

2) I generally do not think that the whole concept is wrong – only the member group should be much smaller (countries that are attuned to Germany). I believe that the inner core of the Eurozone can survive till 2020. For the countries around Germany with similar attitude towards the price stability the Euro is positive. For example Austria had its currency fixed to the German Mark for a long time. For Austria it is and it will be better (more efficient) to have a common currency with Germany. The losers will be definitely countries that supposed that the Euro can hide their unsound economic policy (Greece).

Authors of the Symposium are graduates of Faculty of Social Studies, Masaryk University and Global Politics editors

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Jan Daniel
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17. 6. 2012