Sometime around the turn of the century I was a reluctant economics student and posed an essay question by my cantankerous macroeconomics professor as to whether the Euro is an optimum currency area. The idea comes from Candian economist Robert Mundell and seeks to define an area in which economic efficiency is maximised by the creation of a single currency.
Yet back a decade ago the Europe being built was rather different to the one we have before us today. The single currency was then the crowning achievement of the reunification of Europe after the fall of the Berlin Wall, the requirement made by Mitterand of France to allow Kohl to swiftly reunify Germany, a major (and perhaps final) piece of the EU’s jigsaw puzzle for peace on the European continent.
Returning to my macroeconomics essay, and the answer I then argued, and still stand by, is that a common currency needs labour mobility and a common fiscal policy to succeed. The problem is that events have shown how complex the latter is to achieve, and the roots of the problem are not just economical, but cuts to the very heart of the EU’s politics.
The very process of European integration throughout the last decade, with the 15-state union swelling to 25 in 2004 and 27 in 2007 made the whole thing harder to govern and the partial attempts to fix it – the Treaty of Nice and the ill-fated European Constitution – were not only inadequate as ways to streamline the EU, but also generated major opposition from citizens in referendums.
At the same time a generation of politicians born in the 1930s and 1940s was stepping back, replaced by the likes of Schröder, Blair and Sarkozy, always ready with a soundbite for the 24 hour rolling news channels, but lacking in vision and conviction. Politicians of this ilk choose from among their own when it comes to the top jobs in the EU – Jacques Santer, Romano Prodi and most recently José Manuel Barroso as heads of the European Commission. Limited and technocratic all of them, yet the logic of their appointment crystal clear precisely because they are weak and uninspiring.
As Nick Cohen argues in this week’s Observer, “It was not so much that it was heresy to criticise the euro in debates in Brussels about its future: there were no debates where challenges might be made, and, more seriously, no contingency plans.” I think his wording is a little exaggerated, but now even more than a decade ago, EU policy making is characterised by whatever politicians think they can get away with, with the Stability and Growth Pact the most glaring example – punish countries financially when they already have fiscal pain – how can anyone with a straight face have argued that would really work? Symbolically it imposed fiscal discipline on Southern Europe but without the tools to make it work.
Faced with the current debt problems unleashed on the back of the financial crisis of 2008, what are Europe’s leaders doing? Dithering and fudging as before, determining policies for the future on the basis of what they think electorates are ready to bear, when the choice is actually much starker and growing starker by the day, although his time around the cacophony of concern is clear. Former German Foreign Minister Joschka Fischer outlines the options most clearly, namely “either embrace more economic and financial integration on a federal basis, or face the collapse of the euro and thus the EU, including the Common Market”.
The howls of derision from the populations in Germany and elsewhere are going to be loud, but better save the Euro and the EU through fiscal integration than provoke the mother of all financial crises. That might even bring us closer to an optimum currency area in Europe.