We are in the final stretch of economic diplomacy before the European Council summit at the end of June is supposed to agree reforms to strengthen the euro. Cue growing tension as deadlines loom to strike a compromise, as well as inflating grandiloquence about the historic chance of completing the Europe’s monetary union. But the formulaic rhetoric that goes with the territory is not good for clear thinking; it could lead us to forget what the whole point of the exercise is. What does “completing” a currency actually mean, and what (and why) is the “convergence” that is supposedly indispensable?
In the first of a series of Free Lunches on eurozone reform, let us take time to specify which problems we need to seek solutions for. Otherwise, we can hardly judge in a few weeks’ time whether the summit outcomes will have been a success or a failure.
Most importantly, we should pour cold water on any idea that the euro’s success is synonymous with strong growth and prosperity in all its members. There is little reason to think that a currency regime by itself is a strong determinant of economic growth. That some currency arrangement should reform imperfect policymakers and political leaders into economic geniuses is unrealistic. That it should force economic improvement by short-circuiting democratic and political processes altogether is undesirable. This is true everywhere — if the US president ruins his country’s economy, no one will blame the dollar — and it should be recognised as true in Europe, too. Do not blame the currency for problems that are not for it to solve.
What should be expected of a monetary union, however, is that it should be a source of stability rather than instability, both for the real economy (so that the mechanisms of a currency do not make downturns worse or otherwise create unnecessary economic costs) and for itself (so as to end any speculation that a member country might leave the currency).
Mario Draghi, the euro’s central banker, inimitably set out what this means in his speech in Florence last month; the single best guide to the eurozone’s challenges. What must not happen again, he showed, was the downward spiral in the crisis in which troubles in public finances, banks, and private companies and households all reinforced one another. This intensified the downturns, as governments consolidated their budgets instead of stimulating demand, banks restricted credit and private sector demand shrivelled away. With no source of demand, downward spirals set in that left economies in bad equilibria. On top of this and because of it, capital flight set in on the fear that a country might see that the only way out is leaving the euro.
