The Unfinished Currency


European Union is the most advanced and modern integration project ever started and has resulted in very many remarkable achievements in the world. In its 60 year process, it effectively integrated 27 European countries and 480 million people socially, economically and politically. The adoption of the Euro as their common currency and the Euro Zone area is not only one of the most advanced achievements, but also one of the central pillars of the European Union.
The financial crisis which hard hit Europe in late 2009 posed tremendous political and economic challenges, particularly on the Euro Zone area. Their economies severely contracted and dipped into a devastating recession which affected millions of Europeans in a disproportionate manner.
In a bid to rescue their highly troubled economies, Euro Zone governments were forced to tack a number of austerity measures and agreed to external bail-out schemes from the European Union and its member countries, mainly Germany. The unpopular austerity measures and bail-out terms forced angry Europeans into the streets in protest which in a number of cases caused the unprecedented head-first fall of a series of governments. Currently, the anti-austerity protests in Spain and Greece, uncertainty over their bail-out terms, the resurgence of Catalan secessionism  in Spain, the likely departure of Mario Monti as Italy’s Prime Minister next year, obstacles to creating a credible banking union, and a darkening economic outlook, all combined to dispel hope that the Euro Zone was out of the woods.
Taking this into consideration, many financial analysts questioned the very existence of the Euro as a common European currency. Some on the other hand termed the Euro an unfinished common European currency and recommended the governments of the Euro Zone to learn from the experiences of other countries.
Following the Euro crisis, fiscal discipline became an uphill task for Euro area governments.  It may be hard for many Europeans to imagine, but there is much that Europe can learn from the United States in terms of enforcing fiscal discipline. In his newly published book entitled “Europe’s Unfinished Currency”, Thomas Mayer, the former chief economist of Deutsche Bank suggested that the catch, however, is that it is not from the United States of today, but from the America of the 19th century.
The euro zone’s biggest long-term problem is how to run different regional economies across a fairly diverse economic area without unduly relying on the help of a money printing press. Achieving that goal may prove impossible, however, without the application of a rigorous degree of “tough love” to rein in the profligate and irresponsible spending habits of the various constituent parts.
According to Thomas Mayer, it is precisely on this crucial issue that U.S. history offers today’s Europeans valuable insights into their future financial and economic path. Chancellor Merkel wants to create a “fiscal union” consisting of binding rules for fiscal discipline. However, the experience of the first decade of Europe’s Economic and Monetary Union suggests that this is unrealistic.  As it is obvious, one cannot expect sovereign states to abide by strict fiscal policy rules as long as there is no strong political force at the center to enforce these rules. This is true even when these rules are laid down in international treaties.
What is needed is a European public that is committed to sharing common principles and ideas that would be articulated in the European Parliament, executed by a European government and trickle from there to lower levels of government at the national and regional level. But in view of the considerable differences in culture, and language barriers, how could political parties and candidates for political office formulate and present such programs?
Thomas Mayer suggests that, after all, they would have to be formulated for the whole of Europe, form European government policy, and guide fiscal policy decisions at the lower levels of government. That is a very tall order and the questions go on: How would such a common political discussion even be organized? Would a parliament with members elected mainly on the basis of their nationality have the democratic legitimacy to elect a European government and decide on legislation affecting people’s daily lives?
It is of course conceivable that, in the absence of commonly developed and shared principles to guide policy at all levels, one country could assume the role of the dominant power and impose common principles on the rest, but if a European political union were to be created in such an authoritarian way, it would almost certainly be torn apart again by political movements for secession in the smaller countries. They would find that their national interests are oppressed by the dominating power.
If a leap forward to a much closer political union is against the wish of the peoples of Europe, the Economic and Monetary Union can only be stabilized by returning to its key building principles. Thomas Mayer explains that the common money needs to be shielded from any political influence and states need to take the full responsibility for their sovereign financial decisions. This would require that the European Central Bank refrain from lending to banks and states that may be insolvent, and that it returns to its main task of preserving the purchasing power of money.
It would also require that the principle of member states’ full financial liability is restored, even when this means allowing them to default on their debt. Of course, any external effects of such a default would have to be contained via debt swaps along the lines of the recent debt restructuring for Greece. Above all, it would require that the economies of European Monetary Union member countries are made fit to live with hard budget constraints.
For the deficit countries to restore their capital market borrowing capacity in the new environment of tight credit, it is essential for them to undertake comprehensive measures to reduce public debt levels, regain international competitiveness, and improve growth prospects. The important issue in focus is the creation of a community of equals. As previously indicated, the role model for these countries could be the United States of the 19th century, after the United States Senate rejected requests from the states for a financial bailout in 1842, the principle of fiscal responsibility was established.
The United States political regime during that time combined sovereignty at the state level with fiscal responsibility in a community of equals. That seems a more promising model for Europe than, for instance, having Germany play the role of the dominating power that enforces fiscal discipline through political pressure. The challenge, however, is to move away from the current, unstable state of affairs where economies lack the flexibility to function smoothly in a monetary union and where governments are so heavily indebted that they represent a danger to the financial system of the entire Euro Zone.
Thomas Mayer in his book recommends that, during the transition period to a more stable state, both pressure and help for adjustment would be required. Pressure for adjustment can be created through supervision of national economic and fiscal policies by community institutions and peers.  It can also be enhanced by the threat of sovereign bankruptcy, with the consequence of being stigmatized and cut off from capital market funding for an indefinite period of time.
He also suggested that help for adjustment can be provided by an institution responsible for the monitoring of economic policies, identification of adjustment needs, and conditional financing of adjustment when imbalances have led to a sudden stop of market financing. In the extreme case where a country has run up so much debt that repayment is beyond its capacity to generate the resources for debt service, this institution would also organize an orderly debt restructuring with as little external impact on other debtors as possible.
According to Thomas Mayer, what this is, of course, is nothing but an International Monetary Fund for Europe or a European Monetary Fund. Since the beginning of the Euro crisis in late 2009, many steps have been taken to prevent a collapse of Europe’s Monetary Union, but these steps will amount to nothing if they are taken with the wrong destination in mind which is a political union with a dominating center. The only safe platform, then, is a federation of sovereign states, with a common currency but national responsibility and liability for government finances.