Is the euro ending or beginning?

The architects of the euro thought political momentum would rectify flaws in their plan; the momentum might finally be here.
When
the architects of the euro started drawing up plans for its creation in
the late 1980s, economists warned them that a viable monetary union
required more than an independent central bank and a framework for
budgetary discipline.

Study after study emphasised asymmetries
within the future common-currency area, the possible inadequacy of a
one-size-fits-all monetary policy, the weakness of adjustment channels
in the absence of cross-border labour mobility, and the need for some
sort of fiscal union involving insurance-type mechanisms to assist
countries in trouble.

Beyond economics, many observers noted that
European Union citizens would accept tight monetary bonds only if they
were participating in a shared political community. The former president
of the Bundesbank, Hans Tietmeyer, liked to quote a mediaeval French
philosopher, Nicolas Oresme, who wrote that money does not belong to the
prince, but to the community. The question was: which political
community would support the euro?  

Some of these warnings were
inspired by deep-seated doubts about European monetary unification. But
others merely wanted to emphasise that Europeans needed a
better-equipped and stronger vessel for the journey that they were
contemplating. Their message was simple: national governments must make
their economies fit for the strictures of monetary union; the euro must
be supported by deeper economic integration; and a common currency needs
political legitimacy – that is, a polity.  

In the end, the
leaders at that time – especially German Chancellor Helmut Kohl and
French President François Mitterrand and his successor, Jacques Chirac –
set forth to sea in a light vessel. On the economic front, they agreed
on only a bare-bones economic and monetary union built around monetary
rectitude and an unenforceable promise of fiscal discipline. On the
political front, they did not agree at all, so the creation of a
European polity remained stillborn.  

Some at the time, like
then-European Commission President Jacques Delors, openly deplored this
narrow approach. Though political constraints prevailed, the euro’s
architects were not naive. They knew that their brainchild was
incomplete. But they assumed that, over time, monetary unification would
create momentum for national reforms, further economic integration, and
some form of political unification. After all, that piecemeal approach
is what had helped to build the EU ever since its origins in the coal
and steel community of the 1950s. Few among the euro’s proponents
expected that there would be no significant change after its launch.  

Lack of momentum

But this assumption was mistaken. From the signing of the Maastricht
treaty in 1992 to the tenth anniversary of the euro in 2009, the
expected momentum for creating a common European polity was nowhere in
sight.  

Indeed, very few countries have bothered to spell out,
let alone implement, a euro-inspired economic-reform agenda. Having
agreed to delegate responsibility for monetary policy to the European
Central Bank, most governments put up fierce resistance to any further
transfer of sovereignty. In 2005, a timid attempt to foster political
integration by adopting a constitutional treaty was defeated in popular
referenda in France and the Netherlands.  

So, contrary to
expectations, things stayed put. Soon after the introduction of the euro
in 1999, it became clear that the scenario favoured by the common
currency’s architects would not be realised. Everybody accepted – if
grudgingly – that the bare-bones economic and monetary union was the
only game in town.  

Now, however, what did not happen through
smooth evolution has started to happen through crisis. Since 2009, the
Europeans have already put in place the crisis-management and resolution
apparatus that they initially refused even to discuss. Simultaneously,
governments, under merciless pressure from the bond markets, are
introducing labour- and product-market reforms that they deemed
politically inconceivable only a few quarters ago.  

Market fears

But the bond markets want more. The questions that they are asking
more loudly with each passing day demand answers. Will Europeans agree
to mutualise part of the cost of the crisis? Greece’s creditors (mostly
eurozone residents) have already accepted some of the burden by
accepting a ‘haircut’ on their assets. But, if another country finds
itself unable to bear the fiscal cost of the crisis, will it also shift
the burden to its external creditors in some form or another?  

And,
beyond transfers, will Europeans, or some of them, agree to create a
banking union (that is, Europeanisation of banking supervision, deposit
insurance, and crisis resolution)? Will they agree to pool tax revenues
so that EU-level institutions can credibly take charge of financial
stability?   These questions are vital for the future of the common
European currency. In spite of their desire not to raise them, European
leaders face the uncomfortable prospect of having to answer them – and
without much delay.  

The historical irony is that an
environment of crisis is forcing Europeans to make choices that they did
not want to envisage, much less confront, in quieter times. The Greek
debt crisis forced them to create an assistance mechanism. The Spanish
crisis may well force them to create a banking union. And the threat of a
Greek exit from the euro may force them to decide how far-reaching a
fiscal union they are prepared to embrace.   For many, recent
developments mark the beginning of the end for the euro architects’ bold
creation. But, depending on how Europeans answer these questions,
today’s crises might one day be remembered as the end of the beginning.