Malta has recently co-signed a letter with various other countries, objecting to the Franco-German proposals for eurozone reform. On this Malta is to be congratulated. And also not.
Malta and other countries taking a stand was an important development. It was a clear statement that the days when policy is made by France and Germany who then bounce every other country into following their lead is over – as well it should be. Either Europe is a community, or it is a flock of sheep jumping to Franco-German orders. The latter has no future. But it is also true that the former is challenging.
Getting consensus from 28 countries on almost any issue is becoming well-nigh impossible. It is challenging to move forward in a consensual way without either falling into paralysis or, in the search for consensus, abandoning some of the EU’s rules and principles – as we are seeing with countries who openly flout the rules (Germany and the Netherlands), or abandon some of the EU’s foundational principles (Hungary, Poland).
So, let’s talk about the euro and the future of the eurozone in the current state of the European Union.
I have written before that, in my opinion, the introduction of the euro was one of the most destructive policy decisions since World War II. It has wrought severe hardship in the economically weaker states while giving countries like Germany and the Netherlands an unfair competitive advantage. This has resulted in sustained trade surpluses for these two countries at the expense of everyone else. Surpluses that break EU rules, yet continue to be ignored.
The introduction of the euro was not merely an economic act. It was a political act, a statement about the future of the EU – a future as a single super-state rather than a confederation of sovereign nation states. This was not explicitly stated at the time – probably for fear it would kill the project. But it was the intent.
Yet Europe is not ready for a super-state. And the more time goes by, the less viable that seems to become.
Countries giving up control of their currency is a very big deal. First of all, it represents a huge surrender of national sovereignty. Second, it robs countries of an important lever of control over their national economies along with their ability to respond with currency devaluation, interest rate changes, quantitative easing and the like, to economic shocks. It places them in a prison where the only response available to economic dislocations is to undertake what is euphemistically called ‘internal devaluation’. In other words, subjecting their citizens to extreme and inhuman forms of fiscal austerity of the sort we have seen in Greece.
Getting consensus from 28 countries on almost any issue is becoming well-nigh impossible
That the EU collectively was willing to submit Greece to that sort of adjustment does not say much for its principles and values. At the time of the Brexit referendum, many Leave voters stated that they did not want to be part of a project that could treat one of its own countries in that way.
So now we come to the letter. The thrust of the position was that there was no appetite for sharing more risk across the eurozone or to turn the eurozone into a fiscal transfer union where the economically strong would essentially subsidize the weaker countries. That is not exactly a strong statement of European solidarity – especially coming from countries like Malta who have done nothing but bleat for more solidarity over immigration.
The reality is that no single currency zone can survive without significant fiscal transfers. It happens in the US, the UK, and in every other single currency zone. The idea that countries’ economies will converge, where everyone will magically have balanced budgets is nothing but a fantasy. Since the introduction of the euro, economies of eurozone countries have diverged not converged.
Everyone acknowledges that the euro has a flawed and incomplete architecture. Now we’re unfortunately stuck with the euro. But that doesn’t mean that we necessarily have to be stuck with the flawed architecture.
In short, there are two possible futures for the euro.
The first is to follow French President Emmanuel Macron’s plan for greater eurozone integration with more risk sharing and more fiscal transfers; a Europe that wanted to move towards ‘ever-closer union’ would follow that route. But today, that is politically impossible.
Given that, it is not reasonable for countries like Malta, who oppose that route, to fold their arms and refuse to come up with alternatives. The “I’m alright Jack and the rest of you can just go whistle” attitude cannot persist unless Europe is to break apart.
Maybe there is only one other alternative to the ever-closer union approach. And that is to provide those countries who wish to take it an exit route from the euro. Currently that is almost impossible (though Italy will doubtless explore it more competently and aggressively than did Greece). The costs, complexities and hardships associated with exiting the single currency are formidable. And, because of the system’s rigidity, if such a proposition were to be seriously tested by a large country such as Italy, it could well bring down the whole inflexible edifice.
Rather than continue to muddle through, hoping that, somehow, it will all be OK in the end and storing up ammunition for an eventual big explosion, flexibility must be built into the euro. Absent more money flows across the EU, the option of exit is the only other viable route. I suggest that allowing people to exit, maybe through facilitating a parallel currency as a first step, poses less of a threat to the Euro than waiting for it to blow up – as it inevitably will.
The current approach to the euro is like constructing a building without fire escapes. The idea would be that this would encourage avoidance measures and that those inside the building would be much more careful not to start any fires. That’s all fine. But what happens when, in spite of everyone’s best efforts, a fire were to start anyway?
Malta was right to resist Franco-German diktats. However, Malta and its co-signatories to the letter are being irresponsible in not putting forward alternative reforms to a euro structure that is flawed, dangerous and already destroyed many people’s lives.
Dr Joe Zammit-Lucia is a co-founder and trustee of Radix, the think tank for the radical centre (radix.org.uk) and author of Backlash: Saving Globalisation From Itself.