"Some thougths about the future of the euro"
The real threat to the cohesion of the monetary union is not Italy, or even a post-property-crash Spain.
The real issue is the political gulf between France and Germany.
Susanne Mundschenk and Wolfgang Münchau, Eurointelligence 18/10 2007
What are the circumstances under which the eurozone could disintegrate?
In practice, that would happen only if either Germany or France decided to quit.
Wolfgang Munchau, FT 25/9 2006
As an explanation of why Europeans are on average so much poorer than Americans, productivity is a partial answer at best.
Wolfgang Munchau, FT August 28 2006
Here is a shortlist of things for a politically integrated monetary union to do:
EU voters have been saying: do not move to the next stage of political integration until and unless you fix the projects you have already created. None needs more fixing than the eurozone. If Europe is looking for a political vision for the next decade, it need look no further.
The euro has not brought the promised benefits. Economic growth is low, unemployment high. Countries are not observing fiscal targets. Monetary policy is unresponsive. Labour and product markets are not sufficiently flexible.
Wolfgang Munchau Financial Times June 13 2005
Weak euro reflects uncertainty of euro-zone
Wolfgang Munchau, Financial Times, November 6, 2000
The biggest problem with Europe’s economic and monetary union is not the decline in the external value of the euro, whatever Friday’s currency market intervention suggests. Rather, it is the inability of European governments to move towards full economic union.
The real problem is not the currency or the ECB’s monetary policy. It is the inability of euro-zone governments to move beyond simple monetary union, supported by a couple of budgetary rules, to a more robust economic union.
Europe’s stability and growth pact, which says governments should not incur excessive deficits, is sensible; but it is no substitute for centralised policymaking.
In principle, there is nothing wrong with a purely monetary union as an intermediate step. But, if this is all one can expect, Emu’s future will remain uncertain. Collapse, if it ever comes, may still be some way off - depending on the timing, size and nature of future economic shocks and the degree to which Emu is seen as a bad economic deal for individual member states. But history has shown time and again that a pure monetary union between sovereign states rarely succeeds for long.
One could, of course, conceive of a hypothetical monetary area with almost perfect cross-border labour mobility, a high degree of market deregulation and ”small government”. Such a construct might be viable in theory but the euro-zone is no such economy, nor is it likely to become one.
True, the German government has passed a number of liberalising laws recently, especially the long-overdue corporate tax reform package. But there are also countervailing tendencies, such as the introduction of the 35-hour week in France and the expected extension of worker co-determination laws in Germany.
Euro-zone governments show little desire to embark on substantial labour market reform in the foreseeable future. The European model may be an anachronism but it is still alive.
Structural reform is certainly desirable. Labour market deregulation would help reduce continental Europe’s persistently high unemployment. It might even increase productivity and thus the rate of growth in the long run. But structural reforms alone will not determine whether Emu is viable.
Not even the US economy would be flexible enough to maintain monetary cohesion if faced with a budgetary process as decentralised as the euro-zone’s. Even though the US share of government expenditure to gross domestic product is much lower than the European Union’s, the US federal budget is large enough to act as a stabiliser across regions.
The Europeans have no system of transfer payments and the EU budget is too small for this purpose.
So the euro-zone countries cannot remain as they are: they must move towards full economic union.
A first step would be an extension in the present arrangements of voluntary co-operation between national finance ministries. So far, Europe’s finance ministries have not been willing to pool their policies for the greater good. Germany’s tax reform, for example, was a unilateral act. France and Germany reacted in opposing ways to the recent oil price increase - the French with concessions to the protesters, the Germans by sticking to planning increases in green taxes. The finance ministries are old-fashioned national bureaucracies, each pursuing its own agenda.
France has been a long-standing proponent of economic government for the euro-zone, a concept that was met with the utmost resistance from Germany, which favours much looser co-ordination of policies.
France is now pressing for a much more visible representation for the euro-zone, through the appointment of a euro-zone representative at international meetings. But a euro-zone finance minister without a mandate, without power to influence budgets, would sooner or later be regarded as an irrelevance.
One might imagine such a minister during an economic crisis brought about by, say, a trebling in the oil price, another 30 per cent fall in the euro-dollar exchange rate, or a banking crisis. In such circumstances, the euro-zone would require a series of institutions - market regulators, banking supervisors and, ultimately, a central fiscal authority - all with the mandate to determine policy, and if necessary, to override national institutions.
The trouble is that a close economic union, necessary as it may be for the viability of monetary union, cannot be established without further political integration.
Yet the current is clearly flowing in the opposite direction: EU governments increasingly emphasise inter-governmental co-operation as opposed to a wider role for supra-national institutions.
The weakness of the euro to some extent reflects the uncertainty surrounding the euro-zone’s political direction. This may not suffice as a full explanation but it is better than those that are heard much more frequently - for example, Europe’s unwillingness to undertake economic reform, or the growth differential compared with the US.
It would be unwise to predict that Emu will fail: the euro may yet survive for a very long time. But the odds on its premature demise are shortening.