Indeed, the way Europe now presents itself in fiscal affairs appears to be a show of mad people running about without a head. Facing the looming crisis, indecision, uncertainty, contradiction and lack of logic prevail in European political circles, echoed by the media with scattered, incomplete and contradictory opinions, as if there was a fear to point out reality openly and in its entirety.
This is quite understandable, as the very survival of the European Union so cherished by the member government leaderships is at stake. They set out to build a united Europe artificially structured according to certain norms agreed upon by the leaders of the European Parliament and the European Central Bank under the aegis of a single currency – the euro.
The promised fruit of this new Europe was to be a forward leap in the progress and socio-economic well-being of the population of its 27-member nations. All this was done without requiring those countries to give up their individual government structures. Maintaining political and economic independence – though within certain limits – made the euro project palatable to public opinion.
However, this independence turned out to be the project’s “Achilles heel.” In a single currency regime, any monetary or fiscal imbalance or rigidity in wages and prices – resulting from domestic political pressures or mismanagement by the economic authority of a member country – necessarily and directly affects its real economy, that is, the level of employment and income. Depending on the degree of imbalance, the “sick” country can infect all the others. At the same time, it cannot alter the exchange rate, an action that could serve as a buffer to lessen the negative consequences of those imbalances and thus avoid contagion.
In fact, it is contradictory for a group of nations to have a single currency and allow its members to maintain independent decision-making on economic and financial matters. It is a difficult problem to solve since giving up independence in favor of a central government appears to be an unattainable utopia, especially in countries with longstanding historic tradition and marked by deep and rich cultural differences and customs, as is the case with European nations.
Thus the European Union finds itself in a real conundrum. It must find out how to weather the crisis while maintaining the political and economic independence of its member countries, especially in fiscal and monetary matters.
Reality Comes Knocking
In 2010, Greece went into a crisis because it was unable to pay its debts. At this time, Portugal and Spain are facing an imminent crisis in their balance of payments. Something similar looms in the horizon in relation to Italy.
The common denominator of them all is a lack of fiscal discipline, that is, spending more than one is allowed to and accumulating a debt which threatens to become untenable.
The market’s first reaction is to suspend new loans and make it difficult to renew standing ones, thus causing an explosion in the interest rates. This road quickly ends in default.
In order to avoid this extreme situation, the nations under pressure are forced to spend less. They “tighten their belts,” causing unemployment and a drop in income. Naturally, discontent spreads among the population, with foreseeable social and political damage.
This situation easily makes creditor banks vulnerable and generates instability in the whole financial system, particularly the European one. To avoid contagion, international financial agencies (European Central Bank, IMF and others) rush to aid creditor banks by purchasing from them the “toxic” bonds from nations in crisis in an attempt to save them from bankruptcy by assuming their unsustainable debt. At the same time, central authorities put pressure to bear on the countries to practice fiscal discipline and balance their budgets. In this way, they hope these measures in the long term will enable the nations in crisis to pay off the bonds now in the hands of those international financial agencies.
Who pays for this financial “merry-go-round?” The countries in crisis and the whole group – and within the group, particularly the stronger and more disciplined countries. In other words, everyone carries the burden which is distributed by particular agreements and political negotiations.
Facing this situation, it is entirely reasonable for populations in the stronger and more disciplined countries to ask themselves why they should assume a large part of this cost. Even worse, who is to guarantee that once the situation is resolved, there will be no relapse? These questions are valid and difficult to answer.
The Way Out
The reader easily perceives that the political, social and economic cost stems, in the final analysis, from the keeping of the euro, the European Union’s single currency.
From what we have said so far, it is not difficult to conclude that the European Union member countries are facing this alternative: either they give up managing their own economies or give up the euro. To give up managing their economies means, to no small degree, to renounce their own political independence. Giving up national sovereignty is totally unacceptable to most Europeans. Thus, abandoning the euro is the only hypothesis left.
This way out is not without pain. However, at least it is a step in the right direction. We should not insist on false solutions that do not address the underlying problem. It would be like taking an aspirin to cure cancer. The road of progress in Europe does not run by the euro or any other single currency. All that is needed is a market open to products and resources and a correct individual economic policy with fiscal and monetary stability. In such a climate, the European peoples could make use of all those qualities and methods that are a fruit of ancient traditions that still survive, and they will prosper once again.
At the same time, “undisciplined” countries would be “punished” by the market. However, such sanctions would generally be softer than the present ones and without danger of grave contagion. To insist on the single currency has no relevant economic foundation. In fact, it can be justified only by politico-ideological goals.