WINTER 2016/2017 EUROPEAN HOUSE OF CARDS

Alberto Bagnai THE EURO BREAK-UP: MANAGING THE INEVITABLE

Jens Nordvig THE EURO AS A SOURCE OF DIVISION RATHER THAN UNITY

Stefan Kawalec THE EUROZONE IMBALANCES AND GLOBAL TRADE CONFLICTS

Desmond Lachman THE REAL SOLUTION TO GERMANY’S EXTERNAL IMBALANCE A Brussels-based free market, euro-realist think-tank and publisher, established in 2010 under the patronage of Baroness Thatcher. We have satellite offices in London, Rome and Warsaw.

New Direction - The Foundation for European Reform is registered in Belgium as a non-for-profit organisation (ASBL) and is partly funded by the European Parliament. REGISTERED OFFICE: Rue du Trône, 4, 1000 Bruxelles, Belgium. EXECUTIVE DIRECTOR: Naweed Khan. www.europeanreform.org @europeanreform The European Parliament and New Direction assume no responsibility for the opinions expressed in this publication. Sole liability rests with the author. FOREWORD EDITORIAL

Hans-Olaf Henkel is a former CEO of IBM Europe and a former head of the German Federation of Industries (BDI). He is a member of the European Parliament and a Vice-President of New Direction.

Tomasz Poręba is a Member of the European Parliament and President of New Direction – The Foundation for European Reform. The limits of my language are the limits of my world.

he foundations of the post-WWII Western with the EU. Indeed, the entire enterprise has udwig Wittgenstein’s famous dictum helps illuminate the state of international order are being shaken in undergone profound, disfiguring changes during affairs in Europe. The quality of thinking on economic matters unprecedented ways. State of the global Britain’s membership. Abandoning the principle is reflected by the language and policy debates among elites. economy is the root cause of the wave of of subsidiarity and interfering too deeply in Public discourse driven by policy makers is heavy on discussion Tpopulism and isolationism, which has swept across the affairs of sovereign states, the actions of EU Lof taxes, regulation and the role of the state in the economy, but virtually Europe and the United States. For too long, too many leaders have provoked political backlash. Support absent on monetary arrangements and economic imbalances. people have lived with economic misery from global for the European project is now fading away in imbalances, and the political consequences have, the countries of the eurozone. Despite all this, The consequences of the eurozone crisis and the euro-rescue policy now inevitably, shown up on the both sides of Atlantic. federalist tendencies still run strong in Brussels. reach far beyond the borders of the monetary union. The eurozone, The call for more Europe will not strengthen the now with a higher current account surplus than even China, has Bad economics have consequences. The single EU, and will instead have the opposite effect by contributed significantly to global imbalances. This situation is neither currency was supposed to usher in a period alienating more voters. good for the world nor for eurozone countries, and has profound of prosperity, but instead turned out to be a political consequences, as it has contributed to the rise of isolationism destabilizing force for both the European and The scale of economic misery caused by the in Europe and the U.S. Undoing global economic imbalances in a global economies. The decision by British voters European Monetary Union in Southern Europe has responsible manner is now essential for the health of the global economy. to leave the European Union came in the context been accentuated by the deteriorating condition Globalization is now under heavy fire in Europe. But it should not be of eight years of economic crisis in Europe. In of European banks. Healthy banking systems are blamed for problems arising from the European Monetary Union. contrast to the eurozone, the United Kingdom essential for economic growth, but well-performing managed to return to the road of recovery soon banks also depend on functioning economies. The The European project and the transatlantic alliance have had strong backing after the financial crisis. euro has choked off the engine of the European from both Europe’s elite and broader society. Massive unemployment and economy. It is true that the euro is not Europe’s economic depression have eroded this understanding. Rising public debt When Britain entered the European Economic only problem, but without a new monetary regime and the European banking system are not separate factors but are part of a Community in 1973, the European project was an in Europe the situation will remain bleak. The wider story. Only when the larger picture is in focus can we appreciate the arrangement aimed at improving the economic lessons emerging from the eurozone crisis are economic and political problems facing Europe. This is the aim of this New well being of all Europeans. At present, economic clear: there is no economic justification for a Direction magazine. Only through changing the language of the debate, can success is not an idea commonly associated federal Europe or a single currency. ■ the limits of our world be redefined. ■ TABLE OF CONTENTS

8 10 13 16 20 Desmond Lachman Jens Nordvig Alberto Bagnai Kamil Kamiński Brigitte Granville THE REAL SOLUTION TO GERMANY’S THE EURO AS A SOURCE OF THE EURO BREAK-UP: THE EURO AND THE UNMAKING LESSONS FROM DISMANTLING THE RUBLE ZONE EXTERNAL IMBALANCE DIVISION RATHER THAN UNITY MANAGING THE INEVITABLE OF THE EUROPEAN PROJECT FOR A EUROZONE BREAK UP

34 26 30 33 36 Antoni Soy Mojmír Hampl Zdzisław Krasnodębski Jacques Sapir Hans-Olaf Henkel THE CASE OF THE INSIDE AND OUTSIDE THE EUROZONE THE EURO AS THE ILLUSIONS OF THE THE EURO AND THE SPANISH ECONOMY A BACK-OFTHE-ENVELOPE CALCULATION UTOPIA ‘FIVE PRESIDENT’S REPORT’ GERMAN MINDSET

40 42 44 48 52 Jean-Pierre Vesperini Joachim Starbatty David Liebers Pieter Cleppe Stefan Kawalec THE TRAGEDY OF THE EMU AND A A TRUE KEYNESIAN PERSPECTIVE UKRAINE: THE UNNAMED VICTIM BREXIT: THE EURO’S FIRST MAJOR THE EUROZONE IMBALANCES CALL FOR A NEW FRENCH PARADIGM ON THE EUROZONE CRISIS OF THE EUROZONE CRISIS BLOW TO THE EUROPEAN UNION? AND GLOBAL TRADE CONFLICTS

The magazine was edited by Kamil Kamiński and Hans-Olaf Henkel.

New Direction – The Foundation for European Reform, a non-for-profit organisation (ASBL/VZW) registered in Belgium and partly funded www.europeanreform.org follow us @europeanreform by the European Parliament. Registered Office: Rue Du Trône 4, Brussels, 1000, Belgium. Director General: Naweed Khan. The European Parliament and New Direction assume no responsibility for the opinions expressed in this publication. Sole liability lies with the author. Desmond Lachman THE REAL SOLUTION TO GERMANY’S EXTERNAL IMBALANCE

welcome debate seems surplus all the more troubling on Germany’s large external SADLY, SO LONG AS by effectively increasing the real to have started in the is the fact that it is occurring imbalance, as is the US Treasury GERMANY REMAINS TIED wage level through lowering United States as to what at a time when the German in its latest currency report to TO THE EURO, THERE IS the price of imports. The second should be done about economy is cyclically in a very Congress, the solutions that they LITTLE PROSPECT THAT element would be to substantially Germany’sA inordinately large much stronger position than its are proposing to redress this IT WILL BE FACED WITH loosen German domestic fiscal and external current account surplus. European partners. imbalance are partial at best. As A STRONGER CURRENCY monetary policies to boost domestic However, it is to be regretted that an example, Greg Ip of the Wall ANYTIME SOON. demand to make up for the reduced in this debate little attention is Germany’s maintenance of a Street Journal proposes that the support to the domestic economy Desmond Lachman is a resident fellow being focused on the free ride that current account surplus as large as problem might best be addressed from the external sector. at the American Germany continues to get from it has now would be damaging to by having Germany somehow Indeed, in much the same manner Enterprise Institute. He was formerly a tying itself to a weak euro. Since both the global and the European engineer a rise in its domestic as the IMF would prescribe a Sadly, so long as Germany remains Deputy Director in without a basic change in German economies. From a global wage level. He makes this proposal comprehensive approach for a tied to the euro, there is little the International exchange rate policy, there is every perspective, at a time that there on the grounds that the German country to redress a large external prospect that it will be faced with Monetary Fund’s Policy Development and prospect that the German current is insufficient global aggregate imbalance problem has its roots current account deficit, so too a stronger currency anytime soon. Review Department account surplus will only get even demand, a large German current in excessive savings in the private would a comprehensive approach, Indeed, with US and European and the chief emerging market economic larger in the period ahead. account surplus would constitute a sector. For his part, Brad Setser of albeit in reverse, be indicated for a monetary policies now out of strategist at Salomon drain on aggregate demand in the the Council of Foreign Relations country with a very large external sync and with the European Smith Barney. The fact that Germany is running rest of the world. Similarly, from proposes that the German current account surplus. economy still struggling, there is a disturbingly large external a European perspective, at a time government take advantage every prospect that the euro will imbalance is hardly open to that countries in the European of currently very low interest Two key elements would be continue to depreciate. If that were a fundamental departure from question. According to the periphery are being required rates to finance a major boost to required in such an approach. to occur, there is every likelihood current policy. However, if that most recent official balance of to balance their economies, the infrastructure spending. The first would be to require that Germany’s external imbalance move is not undertaken, the world payments data, it now appears maintenance of a large German a substantial appreciation of would only increase. should reconcile itself to a large that Germany will have a current current account surplus would The truth of the matter is that the the currency facing German German external imbalance for a account surplus of more than US$ make that rebalancing all the more very size of the German external exporters and importers. Such an It would seem that the only way protracted period of time while the 300 billion in 2016 or close to 9 difficult. imbalance makes it necessary to appreciation would be needed both that Germany can get a very much European periphery should brace percent of GDP, which would be contemplate a comprehensive to switch resources away from more appreciated currency would itself for continued tough sledding more than twice China’s current While US analysts are now approach if a substantial reduction Germany’s traded good sector as be if it were to exit the euro. To be in its efforts to reduce its economic account surplus. Making this coming to focus their attention is to be made in that imbalance. well as to reduce domestic savings sure, such a move would represent imbalances. ■

8 9 is called dollars. In the eurozone, it dominant international currency. In many countries, this isn’t limited Jens Nordvig is euros. In each case, the currency The relative values of currencies to economic prosperity, but also has value because it can be used to are determined in foreign exchange includes basic values such as facilitate transactions (buying and markets. For most major currencies democracy, equal opportunity, and VISION VERSUS REALITY selling of goods) and to store wealth today, market forces are allowed political stability. for the future. to determine exchange rates. The supply of and demand for a The euro was created with such But currencies serve a purpose currency will dictate its price in fundamental values in mind. THE EURO AS A beyond providing the ability accordance with economic and Therefore, it should follow to buy a carton of milk, sell a political developments at home naturally that judgment on the house, and accumulate savings and abroad. But the success of a euro’s success should not be SOURCE OF DIVISION conveniently. Governments that currency cannot be judged from based solely on its value against have control of their own currency its nominal strength or weakness the dollar, or against any other have a powerful tool at their alone. currency. Rather, the euro’s success disposal. Having an independent should be based on the currency’s RATHER THAN UNITY currency allows a country to tailor For example, the strong Japanese ability to deliver prosperity for all its monetary and exchange-rate Yen in the period after the Global European citizens and its ability policy to meet the specific needs Financial Crisis was often seen to reinforce the most treasured oney derives its value something else at some time in the control of the supply of money of the economy. For this reason, as evidence of economic failure, European values. from the common future that gives it value. Government helps to ensure trust in the value of currencies are often symbols of rather than success. belief that people can actions underpin this acceptance. the currency. As a society, we have national power. The euro was born out of a political always convert it into Certain laws, such as those that allow entered into this social contract. A currency’s success should desire for European integration. Mgoods and services at will. It is the people to use money to pay taxes, During the nineteenth century, for ultimately be evaluated based on It was a noble idea, but it lacked universal acceptance of the idea help define the role of money in our Each country has its version of example, at the peak of the British its ability to deliver on the core a sound and resilient underlying that money can be exchanged for society. Meanwhile, government money. In the United States, money Empire, the pound sterling was the objectives of the country’s citizens. structure.

10 11 THE EURO WAS BORN this divergence is persisting much OUT OF A POLITICAL longer than the euro-optimists DESIRE FOR EUROPEAN expected. It is now almost ten INTEGRATION. IT WAS years since the Global Financial A NOBLE IDEA, BUT IT Crisis. Germany is growing fast, LACKED A SOUND AND and Italy is still barely growing. RESILIENT UNDERLYING Greece and Portugal still cannot STRUCTURE. THE IDEA engineer sustainable growth, WAS THAT COUNTRIES even after years of internal THAT ADOPTED THE EURO WOULD BE UNITED devaluation, and those countries THROUGH THE COMMON continue to struggle with an CURRENCY AND A overhang of debts, even after the COMMON MONETARY world’s largest sovereign debt POLICY SET BY THE restructuring in Greece. EUROPEAN CENTRAL BANK. The euro is a cause of internal inequality in the eurozone, and a The idea was that countries that cause of political instability too, as adopted the euro would be united opposition towards the European through the common currency and project is growing as a function a common monetary policy set by of increasing dissatisfaction with the European Central Bank. Each the status quo of permanently individual country that was part of lackluster economic performance the eurozone surrendered its ability in large parts of the eurozone. to make its own monetary decisions, The idea was to spur European even in a time of crisis. Unified integration and cohesion and to monetary policy implied that tools create a special bond of tolerance that could help save an individual and cooperation between different economy during periods of severe European cultures. But the euro’s stress were no longer available to inflexibility as an economic system the individual countries. Meanwhile, is pushing many dynamics in a there was no centralized fiscal negative direction. From a long- policy to provide an offset. Unlike term perspective, the euro is a the United States, the European source of division rather than currency union had no backing from unity, and it has the potential to a common federal government that destroy the positive aspects of was able to transfer funds between increased European integration weak and strong regions. What’s achieved over the last sixty years. ■ more, no European institution had any real ability to control an individual country’s budget or spending habits. The monetary union was handcuffed in the event of a catastrophe and also lacked mechanism to deal with business Alberto Bagnai cycle management and growth policies. THE EURO BREAK-UP These fundamental flaws have Jens Nordvig - caused severe economic and founder and CEO financial stress in the eurozone at Exante Data. He since 2010. Instead of being a headed currency strategy and fixed source of increased cohesion income research for MANAGING THE and unity, the euro – through its Nomura Securities. He is the author constraints on economic policy – of “The Fall of the has become a source of division. Euro: Reinventing the Eurozone and Economic growth has diverged in the Future of Global the North and in the South, and Investing” INEVITABLE 12 13 eventy-one years ago, the impossible goal of European institutions fostered external (why force a creditor to pay illusion that fiscal expansion could economically healthy Europe could Axis powers lost WWII, political union. The worst possible imbalances, though for different interest, rather than earning solve this conundrum must reckon be a key partner on the global leaving the US with way was chosen to pursue it, reasons. The original sin of the it?) is that international debtors with the fact that the countries stage, then it should promote a the demanding task of namely by forcing it through Bretton Woods system was to adopt and creditors both benefit from needing fiscal stimulus, i.e. the controlled end to the euro. Undoing Smanaging its victory and defining the establishment of a European the currency of a state as the world international finance: thanks to eurozone peripheral countries, are the euro will be costly, though less a new global architecture. The US monetary union. No democratic currency. The euro’s original sin international lending, the former the very same countries where an costly than its alternative, which did this by setting up ambitious or even meaningful political was to adopt the currency of no can buy goods they otherwise could increase in income would bring is protracted stagnation of the institutions, such as the Bretton process can take place in an area state as a regional currency. Their not afford, while the latter are able about external deficits, again European and hence the world Woods system and NATO, and which does not share a language common flaw is fixed exchange to sell goods that would otherwise fostering the imbalances that caused economy, and the growing risk of by supporting the European or national identity. Yet, despite rates, that prevent balance-of- remain in stock. By proposing such the crisis. a major financial collapse. Secular integration project. Institutions have advice to the contrary from payments adjustment. If, for perishable money, a currency that stagnation and zero interest rates much inertia, which while favoring prominent US economists (ranging whatever reason, this mechanism by design could not be a store of Germany romped to victory by are not a result of some remote stability, may prevent vital change from Feldstein to Krugman), a hasty is hindered, it must be replaced by value, Keynes aimed to discourage manipulating the forex market (as astrological circumstance: they in response to evolving situations. marriage of convenience between something else. The relatively long mercantilism, i.e. the temptation to the US Treasury recently recognised), are mostly the effect on the global This explains both the success France and Germany, with the life of the Bretton Woods system hoard international assets rather but must now choose between economy of using wrong European of many political projects, and single currency as a wedding ring, was secured by financial market than reinvesting them in the world losing everything at once (through rules to manage huge imbalances their ultimate failure. regulation and by the economy, thus mitigating the the collapse of its debtors) or little accumulated due to flawed The same applies to vision of its leader, the potentially destabilizing properties by little (through zero or negative European institutions. Although European integration. NO MATTER HOW MUCH POLITICAL US. These two things are of fixed exchange rates. The euro interest rates). In the long run, Europe is declining, it is still too big CAPITAL IS INVESTED IN IT, THE EURO missing in the eurozone, obtained the opposite result. Its irrational economic choices have to fail without causing great trouble NATO and European WILL FALL, AS TOP US ECONOMISTS where unfettered capital rigidity fostered mercantilism both no winners: bad economics cannot in the global economy. PREDICTED. THE MOST LIKELY CAUSE integration shared the WILL BE A COLLAPSE OF THE ITALIAN movement is fostered by helping redirect trade to the be good politics. What should have strategic goal of creating BANKING SYSTEM, WHICH WILL TAKE in the absence of any benefit of core countries, whose united Europe is now dividing it. No matter how much political a cohesive alliance THE GERMAN ONE WITH IT. regional supervising currency is undervalued in real The United Kingdom is going, and capital is invested in it, the euro that could withstand institution, and where terms, and by preserving the value continental Europe must now choose will fall, as top US economists what was at the time the regional leader, of their net foreign assets. between increasing confrontation predicted. The most likely cause perceived as a credible threat: the was seen as necessary in Europe Germany, is patently obsessed or surrender to German hegemony. will be a collapse of the Italian Soviet Union. They were successful. in order to avoid intra-European by the very short-sighted aim of But the supposed winner of the euro The US, like any global player, must banking system, which will take NATO (not the EU) secured almost conflict. Much has been written increasing its external surplus as game, Germany, is now at a dead reckon with the evidence that the the German one with it. It is in six decades of peace in Europe, about whether building a political much as possible. end. If it wants to keep the eurozone euro has unnecessarily revived the interest of any political power, while economic integration was house starting from a monetary alive, Germany must accept the very the German question, which it was certainly of the declining European a key to prosperity in the former roof was actually a mistake. Like This Wille zur Macht is now loose monetary policies run by the meant to prevent. leaders, and probably also of the world leader, Europe. any economic choice, the euro backfiring. Keynes’s proposal at ECB. Ironically, Keynes’s negative US, to manage this event rather affected the distribution of income, the Bretton Woods conference rates are coming back in disguise, If the US decides that it is in than passively await it. ■ Then something happened. The creating losers and winners. The gives us good insights into what putting strain on the eurozone its best interest to deal with a Soviet system collapsed, which latter of course cannot bring is happening. Keynes proposed banking and pension systems, politically divided, economically among many other things, brought themselves to consider it a mistake. to settle international trade in especially in Germany. On the other failing, socially unstable Europe, back to the fore what had for While opinions on this point may a supranational currency, the hand, a tighter monetary policy then supporting the euro is the centuries been the root cause differ, everybody agrees that as of Bancor, issued by a world bank, would give relief to the creditors, best option. After all, the divide et of much suffering: the difficult today the euro is failing. which would charge an interest but for the very same reason impera (divide and rule) principle relationship between France The reason for its failure is the rate on negative and positive would lead the debtor countries secured a former Empire some five and Germany. Berlin-wall panic same that put the Bretton Woods Bancor balances. The rationale for to immediate collapse by making centuries of existence. If instead suggested the nonsensical and system out of its misery: both this apparently unfair symmetry it difficult to service the debt. Any the US feels that a politically and

Alberto Bagnai teaches economic policy at the Department of Economics of the Gabriele d’Annunzio University in Italy. He is the President of a/ simmetrie – Italian association for the study of economic asymmetries and the author of “Il tramonto dell’euro’. His blog Goofynomics was awarded the best economic information website prize by the Festa della Rete 2015.

14 15 he victorious march of story, or rather, two disparate economic crisis in the eurozone globalization, represented consequences of the same single was branded from its beginning as * best by the Belle Époque, currency. The German surplus the eurozone sovereign debt crisis, Kamil Kamiński was brutally interrupted in 2016 is expected to spike to even though the euro itself has Tby the outbreak of the First World historic highs of about 8,5% of been the source of the problem. In War in 1914. Only in the 1990s GDP. Far from being a sign of 2016, we are dealing with a very THE EURO AND THE did free global markets enjoy a German economic health, this is a high level of public debt in the great comeback. The consecutive function of European and global eurozone: in Greece over 175% enlargements of the European malaise. Economic imbalances GDP, in Italy 133% GDP, in Spain Union and the four freedoms of are a key reason why the global 100% GDP, higher levels than in the Single Market enabled Europe, economy is underperforming. 2010. It is no coincidence. The at least in an economic sense, to Undoing economic imbalances in misguided ‘sovereign debt crisis’ return to ‘the world of yesterday’, a controlled manner is crucial to narrative led to an economic policy UNMAKING borrowing from the title of Stefan restarting global economic growth. of austerity advocated by the Zweig’s famous memoir. A new European Commission, the IMF, Belle Époque was in the making. The European Union reached the ECB and the eurogroup which OF THE The euro was heralded as a symbol its period of greatest triumph in resulted in fall of GDP, massive of this new era for Europe, but 2004 and 2007, as EU enlargement unemployment, and more debt. has instead turned out to be an broke down the last remnants of Italy, Greece, Portugal and Spain EUROPEAN economic trap. It has brought the Iron Curtain and reunited the are the best examples. suffering rather than prosperity, continent. By admitting Croatia in fracture rather than unity—in 2013, the EU began the integration Given these challenges, the ECB PROJECT short, it undermines the European of the Balkans into the European was called to rescue the eurozone. project. project, portending increased Central banks have a key role in economic prosperity and political times of deep economic crisis, but The eurozone has not the ECB cannot solve economic imbalances within the EMU. experienced any serious IT IS TIME FOR EUROPE TO recovery since the financial LEARN THE LESSON THAT BAD From the start, the ECB was crisis of 2007/2008. Even MONETARY ARRANGEMENTS given a mission impossible worse, some European CAN BE VERY DESTRUCTIVE – conducting one monetary economies, including Italy, FOR DEMOCRACIES. policy for a very diverse club are still below pre-crisis of economies. In consequence, levels of GDP. At the heart the ECB’s monetary policy has of the problem is the European stability for that region. In contrast, had damaging consequences: it Monetary Union (EMU). The the euro has brought neither undermines the stability of the launch of the euro distorted the prosperity nor stability—it has European financial sector, has European economy by unleashing done the opposite. The EU of 2016 helped in building up real estate a major, unexpected flow of capital is scarcely recognizable next to the bubbles and hurt Europe’s trade to Southern Europe, eroding its confident, optimistic EU of 2004. partners, to mention just a few. A competitiveness. Today, the euro- The European project has lost its further QE is likely to produce more rescue policy is the primary reason allure, and anti-EU sentiment is political tensions. The crisis of the Europe is undergoing a lost decade. on the rise. Britain has decided to European banking sector is just The price of being in the EMU is to leave the club. Ideas of creating a another offshoot of the eurozone sacrifice the most important tools European federation provoke only crisis. Despite the conviction that for responding to serious economic a stronger backlash against the some form of public bailouts could crisis: autonomous interest rate Union, and a fiscal union cannot save the day, without a return to a policy and currency adjustment. provide prosperity, as the case of healthy economic environment in The economies of Southern Southern Italy teaches us. Europe, a well-performing banking Europe trapped in economic industry is hard to imagine. misery desperately need a deep A monetary system is about more devaluation. Finland would be next than pure economics: it often The single currency has led to the in line as a member of the EMU metamorphoses into a system of decline of centrist politics in Europe that would otherwise benefit from values. The famous words of ECB and the rise of anti-U.S. and anti- devaluation. President Mario Draghi that the NATO radical right and left-wing euro would be saved ‘at all costs’ parties. The promise of stability Moreover, the depression of expressed the ‘euro mindset’, which offered by a fixed exchange Europe’s South and the German seems to prevail among European rates regime turned out to be a surplus are two sides of the same decision-makers. This is why the dangerous illusion. The migration

16 17 crisis has only made matters mistakes of the 1930s of pursuing unmaking the eurozone conducted worse. Worryingly, a strong anti- a deflationary policy in a fixed in the spirit of solidarity among American feeling is penetrating the exchange regime are being repeated. European nations would limit risks European public debate. It should The fall of the Weimar Republic and mitigate losses. In this way, be underlined that TTIP is not just and destabilization of the Japanese centrist politics in Europe would be a trade deal of a new generation, political system were the most tragic restored. This Grand Strategy would but also a reaffirmation of the consequences of those mistakes. be an embodiment of the European transatlantic bond along economic At some point the eurozone will raison d’Etat, as it would lead to a dimensions. Without doubt, a collapse. This is inevitable. If this revival of the European project and strong transatlantic partnership is happens in a chaotic way, it might transatlantic relations. It is time for crucial for Europe. NATO is the best result in a banking panic, and Europe to learn the lesson that bad guarantee for European security. therefore would be a cause for monetary arrangements can be very As the post-Cold War world order serious concern. It would be an destructive for democracies. ■ decomposes at the same time that affair with dire global repercussions. new threats such as terrorism The EU needs a new Grand Strategy are on the rise, the transatlantic based on a controlled dismantling alliance ought to be renewed and of the euro. Debt relief in the case strengthened. of some countries must be a part of the deal. Were the US to support a The ‘euro mentality’ has produced new European Grand Strategy, this the bizarre but now commonplace would be of benefit to both parties. idea that a euro break up would be Prudent pro-market economic a doomsday scenario for the EU. policies on national and European This view is deeply wrong. In fact, levels should be implemented after it completely inverts reality. If the the realignment of exchange rates in Kamil Kamiński is an single currency persists, it has the Europe to facilitate a return to robust advisor to CEO of potential to be the undertaker of and sustained economic growth. PKO BP. He worked the European project. The grave Only a coordinated strategy of previously in the public sector and strategic advisory. * The article represents solely the private opinions of the author and it does not reflect the view of PKO BP S.A.

18 19 n 1994, Linda Goldberg, Barry when Russia started – in a form of Ickes and Randi Ryterman economic self-defense – to impose concluded their article on the strict policy and convergence breakdown of the ruble zone conditions on the FSRs that they I(RZ) by drawing what they depicted decided to opt out of this monetary as an “ironic” contrast with the union and introduce their own contemporary progress towards national currencies. By 1994, the RZ monetary union in Europe: had gone into the dustbin of history.

“In the European Community, This sobering precedent for participation in the Exchange the eurozone (EZ) prompted a Rate Mechanism, has in part, Bloomberg reporter to comment been linked to the desire of in June 2012: “In hindsight, it’s countries to import the monetary amazing that the planners of the discipline imposed by a strong euro currency didn’t think more centre, Germany. This embracing about the failure of the ruble zone of monetary discipline in Europe when they were building their own does not threaten the sovereignty grand architecture.” 3 In fact, the so- and independence of the member called planners did think a lot about countries. By contrast, the decision the RZ. Within days of the signing of of countries to stay in the ruble the Maastricht Treaty in December zone clearly restricts the pace 1991, the Soviet Union collapsed and direction of their economic and the RZ comprising the now reforms. Departure from the ruble sovereign FSRs was established. At zone is a rejection of both Russia’s precisely the moment when Europe control over monetary policy had agreed to launch a monetary as the centre and or of Russia’s union between sovereign states, the reform strategy.” 2 last thing European officials wanted was the awkward spectacle of the These authors missed the true failure of a similarly constituted Brigitte Granville irony. The story of the RZ is that it monetary union on Europe’s started out by allowing the Former doorstep. Soviet Republics (FSRs) to share Russia’s currency with virtually no Accordingly, the “planners of the constraints on their sovereignty euro” gave strong political support LESSONS FROM – in the sense of being forced to to the RZ. Just as the creation of abide by certain rules about how the euro had been based on a they conducted their monetary, contestable economic rationale to fiscal and financial sector policies. do with optimal currency areas, In particular, for a time the FSRs so the euro architects made out DISMANTLING central banks were able to issue an economic case for the RZ as a non cash ruble as they pleased. So way to preserve the deep trade the RZ had two effects: it allowed links among the FSRs. Political the FSRs not to do the necessary considerations were at work here THE RUBLE reforms; and it undermined – ranging from fears about the Russia’s own reforms aimed at destabilization of a nuclear power macroeconomic stabilization (or, as a result of excessive economic to put the matter more precisely, dislocation to a more penny- ZONE FOR A the RZ completed the bad job that pinching concern that radical the Russian central bank (CBR) was economic adjustments in the itself doing on fighting domestic ex-USSR – although necessary and EUROZONE inflation). It was only in 1993 ultimately beneficial – might lead to 1. Brigitte Granville, Centre for Globalisation Research, Queen Mary University of London, London, (e-mail: [email protected]). As member of MFU I created the Monetary Report which was at the beginning of the 1990s the main source of monetary data and was widely used by international organizations, central banks, embassies and academics. 2. Goldberg, Ickes and Ryterman, 1994: 321 BREAK UP 3. http://www.bloomberg.com/news/articles/2012-06-08/the-ruble-zone-collapsed-in-the-1990s-and-it-was-bad

20 21 GERMANY COULD introduced and prices liberalized In the case of the FSRs, the political interests of the powerful industry the Vneshekonombank default “ironic” lesson of the RZ story for ITSELF DECIDE TO the inter-FSR share of total trade motivation was very different. lobby that wanted central on short-term trade credit in Europe is that as the ERM morphed LEAVE, OR INSIST ON decreased from 57 percent in 1992 Newly endowed with sovereignty, bank credits to underwrite December 1991, these quasi-fiscal into the EZ, the peripheral EZ STRICTER RULES (OR, to 33 percent in 1997. 7 the FSRs had little will to work the continuation of familiar expenditures through the CBR countries experienced precisely AT LEAST, THE STRICTER toward a cooperative RZ as transactions with suppliers and were financed almost exclusively such an erosion of their sovereignty IMPLEMENTATION In addition to dubious economic the common currency became off-takers – very much including by money creation, leading to very and independence that Russia OF PRESENT RULES) rationales, the origins of the RZ the symbol of “the last Soviet in the various FSRs. They had high and volatile inflation. 14 ended up requiring from the FSRs WITH THE RESULT and EZ shared a further common institution”. 10 At the same time, a powerful ally in the Soviet- as a condition for continuing to THAT OTHER WEAKER feature: political voluntarism. they did not immediately trash the minded CBR governor Viktor This dynamic changed when Boris share the ruble. Applied to the COUNTRIES OPT OUT. Just as, in the case of the EZ, RZ as they did with other Russian Gerashchenko (appointed on Fyodorov was appointed Minister EZ, the analogy of the collapse the governing class in France initiatives to establish some supra- 17th July 1992) who provided of Finance in January 1993. The of the RZ suggests two scenarios: calls for larger amounts of balance saw monetary union as a way national institutions such as the abundant cash and interest-free fight against inflation became a either the FSR-equivalents – i.e. the of payments aid from western to enhance French power by armed forces. On the contrary, and loans amounting respectively to 3.1 major priority and credits to FSRs countries that are less competitive countries (which, both bilaterally preventing the Bundesbank being in a way that foreshadowed the percent of Russian GDP and about a major target. The incentive to than Germany – finally balk at the and through the international the sole property of (reunifying) present-day relationship between 10 percent of Russian GDP by the limit the cost of the RZ was given constraints of the present rules- financial institutions, had refused Germany, much of the Russian the ECB and EZ countries’ fiscal end of 1992. 13 Since Russia had lost by the negotiations with the based transfer union and decide to to grant Russia the same debt relief elite were similarly anxious to authorities, the incentive for the access to international credit after IMF on a new credit line facility leave; or else, Germany comes to from which other post-communist salvage as much as possible from FSRs was to run deficits as large as especially designed for Russia (the regard the existing arrangements, transition economies like Poland the Soviet Union through which possible by issuing ruble credits Systemic Transformation Facility whereby the ECB (and ESM) in had recently benefited). Russian power had been projected. that “increased the real purchasing REFERENCES - STF). By this time, the IMF – effect finance budget deficits just as Bordo and Jonung concluded of the domestic government, but having previously joined the EU in the CBR used to finance the FSRs, However, that may be, the that monetary unions are always the cost falls on holders of nominal • Aslund, A. (2002). Building capitalism, the supporting the RZ – had recognized as posing an intolerable actual tax transformation of the former Soviet bloc. economic argument about politically motivated – driven (as assets throughout the currency Cambridge, Cambridge University Press. the necessity for each of the FSRs burden – and/or potential inflation commercial relations within the argued by Mark Mazower, quoted area.” 11 12 to introduce their own national tax burden – on its taxpayers. At • Bofinger, P. (1993). Options for a new monetary Former Soviet Union (FSU) was in the same Bloomberg wire cited framework for the area of the Soviet Union, currencies (Pomfret, 2002) (this that point, Germany could itself Reform issues in the former Soviet Union. flawed. Those relations were the above) by “an ideological vision of This FSR agenda was supported European Economy, Commission of the European IMF-EU dynamic seems like the decide to leave, or insist on stricter legacy of central planning; and the elite”. 8 9 inside Russia by the economic Communities, Directorate General for Economic story of Grexit foretold); rules (or, at least, the stricter and Financial Affairs. 49: 181-193. once the Soviet Union collapsed, implementation of present rules) there was scant economic rationale • Bordo, M. and L. Jonung (1999). “The future of with the result that other weaker EMU. What does the history of monetary unions In April 1993 technical credits for such ties to be maintained. tell us?” NBER Working Paper Series 7365 were abolished and all previous countries opt out. ■ (September). Intraregional trade before price credits to FSRs accumulated liberalization was mispriced and • Conway, P. (1995). “Currency proliferation: the over 1992-93 were transformed monetary legacy of the Soviet Union.” Essays mostly done on a barter basis, in International Finance, International Finance into state debts (denominated in leading to hoarding, black markets Section, Princeton University, Princeton, New Jersey, 197(June). US dollars and with an interest and shortages. 4 Most of the Soviet rate linked to Libor) channelled • Dornbusch, R. (1992a). A Payments Mechanism trade was based on products for for Eastern Europe and the Commonwealth, Paper through the budget therefore which there was no demand. presented at the EC seminar on the Soviet Union, under the control of the Ministry January. Operating under a ‘soft budget of Finance. This limited the constraint’ free of competitive • Ferguson, N. and B. Granville (2000). “Weimar on the Volga”: Causes and Consequences of Inflation generosity of the CBR chairman to market disciplines, FSR state in 1990s Russia Compared with 1920s Germany.” the FSRs. With the tightening of The Journal of Economic History 60(4): 1061-1087. enterprises supplied goods to other credit policy to FSRs, their demand republics, regardless of their needs • Gaddy, C. G. and B. W. Ickes (2002). Russia’s for cash increased dramatically virtual economy. Washington D.C., Brookings Brigitte Granville and capacity to pay – and assuming Institution Press. and became the main threat. – Professor of instead that CBR credits would • Goldberg, L. S., B. W. Ickes and R. Ryterman Russia acted on 24th July 1993 by International suffice to settle all transactions. 5 (1994). “Departures from the Ruble Zone: the introducing a monetary reform Economics and implications of adopting independent currencies.” Economic Policy Gaddy and Ickes summed up the The World Economy 17(3): 293-322. where Soviet-era banknotes at Queen Mary survival of post-Soviet industrial (depicting Lenin) circulating in the University of London, • Granville, B (2002). The IMF and The Rouble Zone, London. The author enterprises as being “despite Response to Odling-Smee and Pastor, Comparative FSRs ceased to be legal tender in was the main Economic Studies, XLIV, no.4 (Winter 2002): 15 their performance rather than 59-80. Russia. The FSRs were forced to adviser in the Ruble because of it”. 6 While there was choose between: introducing their zone negotiations • Granville, B. (1994). “Farewell, Ruble Zone “ as member of the a gravity argument based on the Stockholm Institute of East European Economies own currencies; or negotiating Macro and Financial short distances between the FSRs, Working paper November. with Russia on Maastricht-like Unit (MFU) of Russia created by Professors once national currencies were • International Monetary Fund (1994). “Financial criteria. They preferred to go their Anders Aslund relations among countries of the Former Soviet own monetary way. and Jeffrey Sachs, Union.” Economic Review 1. Economic Advisers to the Ministry • Kornai, J. (1979). Economics of shortage, Dornbusch, 1992a: 8 http://www.bloomberg.com/news/arti- Conway, 1995: 7 Amsterdam North-Holland. So, to return to the quote from of Finance of the 4. 9. 12. Russian Government, 5. Kornai, 1979 cles/2012-06-08/the-ruble-zone-collapsed-in-the- 13. IMF, 1994, table 2: 26 the Goldberg, Ickes and Ryterman 6. Gaddy and Ickes, 2002:3 1990s-and-it-was-bad 14. Granville, 1994, Ferguson and Granville, 2000 • Pomfret, R. (2002). “The IMF and the Ruble Zone “ November 1991 - 7. Aslund, 2002: 129. 10. Aslund, 2002: 204. 15. IMF, 1994: 44 Comparative Economic Studies 44(December): 37–47. paper that we started with, the January 1994. 8. Bordo and Jonung (1999) 11. Bofinger, 1993: 183

22 23 some timely contribution of the Antoni Soy public sector, and all that allows that the saving of the private DEBT AND AUSTERITY IN THE EUROZONE sector is increasingly more and more important than the private investment.

Given these conditions, the THE CASE OF THE policy of “internal devaluation” offers no solution, and produces a vicious circle of increasing austerity. At the same time, the belief that the solution is repealing austerity measures and promoting expansionary policies is just a dream. The existence SPANISH of the euro—which means that countries do not have their own currency, or the instruments for the implementation of their own sovereign economic policy—makes this all impossible.

ECONOMY The current crisis is not a public debt crisis, but a crisis of private external debt. Consequently, he fundamental cause of THE CURRENT CRISIS ‘sudden stop’ crisis - not a public- Over the last three years of Spain’s period of growth from the priority of economic policy the crisis in the eurozone, IS NOT A PUBLIC DEBT debt crisis”. economic expansion (2005-2007), 1990 to 2007, private sector debts should be to address the balance especially in its periphery, CRISIS, BUT A CRISIS OF the Spanish economy had a surplus increased within the economy, of payments (“External Compact”), has been mounting PRIVATE EXTERNAL DEBT. In fact, Spanish private debt was in the public sector. However, with and investment grew more rather than equilibrium on public Tprivate sector debt (households CONSEQUENTLY, THE 101.1% of GDP in 1999, reached the onset of the crisis, the deficit than savings. This was financed PRIORITY OF ECONOMIC sector balance sheets (“Fiscal and businesses), which in the case 217.9% of GDP in mid-2010, and was grew rapidly to a peak of 11% in largely (especially after the Compact”). The proposal that of Spain was largely due to the POLICY SHOULD BE still 175.8% in 2015. Breaking this 2009. Though the deficit has fallen implementation of the euro) TO ADDRESS THE international trade should be housing bubble. The crisis was figure down further, household debt since 2013, its level in 2015 was with external resources, while balanced, besides being logical, not caused by public debt. Public BALANCE OF PAYMENTS was 38.8% of GDP in 1999, reached still higher than any G7 country the public sector reduced public (“EXTERNAL COMPACT”), is not new: it was proposed by debt has been a consequence of 84.8% in mid-2010, and is now (excepting Japan) and is far above deficits reaching a surplus in the Keynes at Bretton Woods and it is RATHER THAN the 4.5% of GDP threshold outlined last three years of the period. the crisis. Private debt has been EQUILIBRIUM ON PUBLIC 68.6%. Business debt was 62.3% also what Meade suggested later to converted into public debt in order SECTOR BALANCE SHEETS of GDP in 1999, reached 133.1% in by the stability pact and the When the crisis began, the private ensure that economic integration “fiscal compact” for the Eurozone. sector deleveraged, with savings to reorganize and save banks and (“FISCAL COMPACT”). mid-2010, and is currently 107.2% could function. ■ financial institutions, especially of GDP. Companies borrowed more The structural deficit, although exceeding investment each year in the northern countries. These quickly than families before the declining, remains at 2.4% of GDP, beginning in 2009. Simultaneously, banks granted too much credit— euro area, creating a dichotomy crisis, and are now deleveraging well above the 0.4% envisaged by external investment plummeted, in risky, irresponsible ways—to between those countries that faster but in any case more the law of budgetary stability. and the public sector saw its debts the private sector of southern were generating surpluses in slowly than they borrowed. And increase too quickly and intensely. European countries, so that their private sectors and those globally, private debt levels remain Not surprisingly, these significant In short, private debt became these countries could in turn buy generating deficits”. Later, in 2013, important to monitor as they could public deficits have dramatically public debt. products from northern countries, the Vice President of the ECB, Vitor lead to a new crisis of excessive increased public debt (more than in especially Germany. Constancio, acknowledged that and uncontrolled indebtedness in any country in the G7), which rose The scenario in Germany, where public debt was a consequence the hypothetical case of sustained from 35.5% of GDP in 2007 to 98.9% private savings have exceeded Some heterodox economists and not a cause of the crisis, economic recovery. of GDP in 2015. This corresponds private investment virtually defended this thesis even before while excessive private debt and to an increase of 179%, 2.5 times every year, has been markedly the crisis began. It is noteworthy risky, inefficient management of At the same time, external debt more than in Germany, which has different. Since the reunification, that in October of 2011, the credit by the financial sector was in Spain as a percentage of GDP grown less but 1.8 times more than public sector borrowing has monthly newsletter of European the primary cause of this crisis. was about 40% in 1995, rose to to France, the European country of driven most investment. Antoni Soy is Professor Central Bank (ECB) said: “During Even more orthodox economists almost 100% in 2003 and increased the G7 where increases more after However, things changed after the of the University of Barclona. Former the years prior to the financial (Baldwin and Giavazzi among to 167.9% of GDP in 2015. These Spain. introduction of the euro because Deputy Minister of crisis, sectoral imbalances were others), who had defended high levels of external debt have trade surpluses grew, which Industry and Business in the Government of building across the private the contrary position, in 2015 rendered the Spanish economy Analyzing balance sheets by has become the sector which Catalonia sectors of some countries in the recognized that “this was a classic very vulnerable. sector, it is clear that during now finances the economy with

24 25 Mojmír Hampl

ince its very inception, the And now let’s look at the facts. This means that after an average INSIDE AND OUTSIDE THE EUROZONE EMU has been touted by its One way of assessing whether EZ member economy entered, its founding fathers and key the euro really has brought more pace of economic growth halved. representatives as a way growth to eurozone members is to Sto enhance the economic growth compare their growth rates prior Of course, this comparison is not of the participating economies. to entry into the EMU with those entirely fair, as it mixes economies A BACK-OF- For example, a leaflet that the prevailing since then. Using IMF which have lived with the euro European Commission (EC) data on real GDP growth in each for a number of years with recent produced in 2005 and that is still of the nineteen economies that entrants – such as the Baltics – accessible on the EC’s website, says are now members of the eurozone whose economic growth may not that the euro “contributes greatly (EZ), the average growth rate yet have been strongly affected THE-ENVELOPE to the economic stability needed between 1990 and the last year by EZ membership (although for more growth”. 1 The euro before EZ entry is 3.3%, while for thanks to their fixed exchange rate was seen and presented by many the time period inside the EZ the almost as a miraculous wealth average growth rate is a mere 1. http://ec.europa.eu/economy_finance/publica- CALCULATION generator. 1.7% (see the last row of Table 1). tions/publication6706_en.pdf

26 27 EU COUNTRIES LIVING shocks except the switchover to the as needed. Second, growth in a TABLE 1. WITHOUT THE EURO euro, then this impact was roughly number of EZ economies has been HAVE NOT PAID ANY neutral. The growth effect of the hindered by excessively tight REAL GDP GROWTH RATES OF PRICE FOR NOT OPTING euro thus seems to have been as regulation of various parts of the EZ MEMBERS (1990 -2015) IN AS MANY EUROPHILES bad as is implied by the above- economy. Third, governments have FALSELY PREDICTED. mentioned reduction of the growth often been too relaxed about the QUITE THE OPPOSITE: AVERAGE REAL GDP GROWTH (YOY, %) rate in 1999 entrants from 2.9% sustainability of public finances in YEAR OF ENTRY NOT HAVING THE EURO before the euro to 1.8% with the good times, making public finance COUNTRY OUTSIDE EZ INSIDE EZ INTO EZ HAS PROVED TO BE A euro. a source of problems rather than NICE ECONOMIC BONUS Austria 2.63 1.61 1999 FOR THEM. solutions in bad times. Last but not One might object that EU least, in some countries banking Belgium 2.05 1.65 1999 economies outside the EZ, largely sectors have faced rather cavalier Finland 1.35 1.64 1999 regimes, all the Baltic countries transition or post-transition ones, supervision, making room for France 1.85 1.40 1999 were de facto passively accepting have been subject to specific ugly credit bubbles and sudden the monetary conditions of the pressures which make them an reversals in capital flows. Germany 2.24 1.29 1999 EZ anyway). Narrowing our unsuitable “control group”. The Ireland 6.68 4.06 1999 sample to the eleven economies primary specific pressure, however, The crisis years opened the eyes Italy 1.41 0.30 1999 which entered the EZ at the very seems to be real convergence, of many policy makers, observers Luxembourg 4.35 3.49 1999 beginning in 1999, they grew at an that is, the process whereby and voters. Recently, a lot of effort Netherlands 3.06 1.51 1999 average yearly tempo of 2.9% in the these economies gradually has been made to improve the period 1990–1998 but only 1.8% in catch up with the advanced EZ’s institutions and policies. Alas, Portugal 3.35 0.62 1999 1999–2015 (see the last-but-one row European economies in terms of some of the design flaws are most Spain 2.57 1.86 1999 of Table 1). The growth rate during GDP per capita. Assuming that probably irreparable without Greece 2.45 -0.06 2001 the euro years has only been demographic changes have not making changes that are hard to Slovenia 4.09 0.72 2007 around three fifths of what it used been dramatically different across achieve in standard democracies. to be before the euro. Europe, the catch-up in terms of One can thus summarize the Cyprus 4.51 -0.74 2008 GDP per capita means that the eurozone as so far having been Malta 2.31 2.91 2008 Maybe, however, the creation of the differential in the rate of growth a wealth destructor rather than Slovak Republic 5.36 1.64 2009 EZ roughly coincided with other of GDP (non-EZ members versus a wealth generator. And there is Estonia 3.96 3.66 2011 shocks which hit many economies, EZ members) can be expected to no reasonable cause to believe including those eleven 1999 be positive but fall over time. GDP the future will be any different. Latvia 3.29 2.55 2014 entrants, thus contaminating our growth rates in the non-EZ group EU countries living without the Lithuania 4.58 1.59 2015 comparison. If these other shocks since 1999 are thus likely to reflect euro have not paid any price for AVERAGE OF 1999 ENTRANTS 2.87 1.76 were growth-reducing, then in a downward “convergence shock” not opting in as many Europhiles AVERAGE OF ALL 3.27 1.67 their absence the observed change which GDP growth rates in the EZ falsely predicted. Quite the in GDP growth in the 1999 entrants do not contain (assuming away opposite: not having the euro has would have been less negative or potential convergence processes in proved to be a nice economic bonus perhaps even positive. One way the EZ periphery). for them. ■ to estimate the direction and size TABLE 2. of these other shocks is to look at To sum up, our back-of-the- REAL GDP GROWTH RATES OF what happened in the same time envelope calculations indicate that window in the rest of the EU. EZ membership alone caused the EZ NON-MEMBERS (1990 – 2015) average real GDP growth rate in EZ The “rest of the EU” consists mostly member economies to fall by more AVERAGE REAL GDP GROWTH (YOY, %) of economies which, in the early than one percentage point. COUNTRY 1990s, were undergoing periods of BEFORE 1999 SINCE 1999 often rather wild transition. This This negative impact can be Bulgaria -1.61 3.12 is why this time we should take explained by various weaknesses Croatia 5.09 1.71 the “pre-euro” time period to start in macroeconomic as well as only in, say, 1995. The year-on-year Czech Republic 1.10 2.54 structural and financial policies Mojmír Hampl is the real GDP growth in this period in within the EZ. First, the EZ consists Vice Governor of the Denmark 2.85 1.25 the current nine non-EZ members of rather heterogeneous economies, Czech National Bank Hungary 2.55 2.19 since 2008 and a was about 2.5%. Since 1999, these so the ECB’s single monetary member of the CNB’s Poland 6.26 3.62 nine economies have continued to policy is often sub-optimal for Board since 2006. He served as a board Romania 0.05 3.43 grow by some 2.5% each year on some EZ members; however, the member of the Czech average. So, if the developments relevant adjustment channels Consolidation Agency, Sweden 3.17 2.45 in the non-euro part of the EU a state-run bad asset (fiscal transfers, labour market institution, between United Kingdom 2.92 2.01 really reflect the impact of all other movements) have not worked 2004 and 2006. AVERAGE OF ALL 2.49 2.48 Source: IMF

28 29 “The euro succeeded beyond even former and current senior staff truth is different—the failure of the most enthusiastic projection of members suggest that, after a the euro is about failed economic its supporters” - observed Jeremy heated internal debate, the view reasoning, which like all human Rifkin in his 2004 bestseller The supportive of what was perceived reasoning has its limits (a fact often Zdzisław Krasnodębski European Dream. 1 Today, the more to be Europe’s political project ignored by economists). pertinent question is how anybody ultimately prevailed in guiding could have ever believed the euro the Fund’s public position.” 2 For most economists, the monetary would be a success. union represented another logical Ambrose Evans-Pritchard step in strengthening the single Notwithstanding some critical summarized this report in the The European market. As Harold James THE EURO AS voices, mostly from the US and Telegraph: reminds us: the UK, the majority of economists and institutions of global financial “The International Monetary “There was a clear economic as governance (such as the IMF) Fund’s top staff misled their well as political logic behind the supported the introduction of the own board, made a series of creation of a single European euro. In July of this year, a team of calamitous misjudgements currency.” 4 independent experts writing on the in Greece, became euphoric record of the IMF commented that: cheerleaders for the euro And further: UTOPIA project, ignored warning signs of “Before the launch of the euro impending crisis, and collectively “The quest for European in January 1999, the IMF’s failed to grasp an elemental monetary coordination and public statements tended to concept of currency theory.” 3 then for union was a response emphasize the advantages of to genuine (and still-existing) the common currency more The report gives the impression problems of currency instability than the concerns about it that that the IMF succumbed to political and misalignment at the were being expressed in the pressure and ignored economic international level.” 5 broader literature. Individual principles and facts. Today, the staff members did express monetary union is seen as an Basic textbooks on the EU explain that such concerns. Interviews with arbitrary political act against the creation of the monetary union economic rationality, a plot of politicians against economists, a “Was driven by the understanding disastrous victory of political will that few barriers to the over economic reason. But the completion of the single market were as fundamental as the existence of multiple different currencies with fluctuating exchange rates.” 6

In this way, it seemed a necessary, logical, and rational measure for completing the common European market. This was, in sum, a manifestation of the conviction that

“Gains already generated by single market and capital liberalization could not be fully realised unless accompanied by monetary union.” 7

1. Jeremy Rifkin, The European Dream, Cambridge: Polity Press, 2004, p. 64 2. The IMF and The Crises in Greece, Ireland, And Portugal: An Evaluation By The Independent Evaluation Office, 18 July 2016, p.23 - http://www.ieo-imf.org/ieo/files/ completedevaluations/EAC__REPORT%20v5.PDF 3. Ambrose Evans Pritchard, IMF admits disastrous love affair with the euro and apologises for the immolation of Greece, The Telegraph, 29. 6. 2016 4. Harold James, Making the European Monetary Union, Cambridge Mass.: Harvard University Press, 2012, p. 1 5. Ibidem 6. John McCormick, Understanding the European Union, Palgrave Macmillan: Basingstoke, New York 2008, p. 157 7. Alan W. Cafruny, J. Magnus Ryner, Critical Political Economy, in: Antje Wiener, Thomas Diez (eds), European Integration Theory, Oxford: Oxford University Press, 2009, pp. 221-240 quotation p. 231

30 31 This “rationality” was of course this political change was supposed problems, is precisely the enemy premised on an assumption that to be the old yet reborn continent of liberty. The enemy of liberty is “ever closer” Union is always a net – Europe. European integration also historical determinism, the positive, that the single market was meant to be more than just the conviction that history has one, brings advantage to all European ultimate solution to old problems clear direction and where there are countries and regions. It was an of Europe’s past of war and some people – Marxist philosophers element of a utopian world-view, destructive nationalism, but also a or neoliberal economists - who which became dominant after 1989. model for the world to follow. The know that aim of history. Such formerly “dark continent” 9 was to determinism, paradoxically, has Jacques Sapir The 1980s was a decade of lost become a shining example for all of the tendency of seducing society illusions. The decline of “real humanity, a lodestar of progress. into radical social experiments and socialist” countries caused a shift in Monetary union was a central constructivism on a grand scale. THE ILLUSIONS OF THE the intellectual atmosphere in the element of that world-view – a The euro was such an experiment. West. Marxists of many different powerful symbol of Europe’s It turned out to be painful as such varieties began to slowly experiments always are. vanish from Western intellectual life and The Brexit referendum, ‘FIVE PRESIDENT’S Western universities. The the failure of the euro rise of postmodernism, and the whole financial with its criticism of crisis show us once again the Enlightenment, that history is open, our REPORT’ reason and the idea of knowledge limited and progress was the result our pretence of moral of lost progressive superiority a vanity. hopes of moving Economists do not have beyond capitalism and access to divine insights parliamentary democracy. and, like all human beings, As communism finally are influenced by current came to an end, a world intellectual fashions, without alternatives political ideas, and moved emerged. That should by their own personal have also meant a world without unity and integration, and a moral and political convictions. utopian projects. Liberal democracy vehicle for moving towards ever- Economics is not a strict science, and free market economics closer union. National currencies but shares weaknesses (as well as remained the highest option for seemed absurd anachronisms in advantages) with social sciences. Its humanity. Many of those, who the global economy – as did the power of prediction and control are now ridicule Francis Fukuyama many small German states before limited. Markets are not rational, for his proclamation of the end of unification in 1871. Removing them and never fully free; a totally open history actually, until now, shared seemed consistent with economic society is a chimera as is a totally his position that this form of polity reasoning and, equally important, a liberal democracy. We are imperfect and this form of economy are final requirement for cultural and moral and therefore free. ■ human achievements. However, progress towards the development democracies were not yet really of a collective European identity liberal and markets still were not that would overcome “nationalism”. sufficiently free. Such a utopia of a totally liberal In this way – and largely unnoticed democracy, open society, and free – a new utopian ideal emerged: an markets was – as a utopia always economic utopia of a totally free is - in fact against liberty, because global market and the political liberty can exist only where utopia of a world without sovereign there is a possibility of action, of states as political entities, without choice between different aims. Zdzisław Krasnodębski borders, without nations and their The pretence of the possession of is a sociologist, cultural identities, without dogmas ultimate knowledge and striving social philosopher 8 and publicist. He is and limitations. The pioneer of for “totality”, one solution for all a professor at the University of Bremen and currently serves 8. Against my expectation, see: Zdzisław Krasnodębski, Upadek idei postępu (Decline of the Ideas of Progress), Warszawa: as a Member of the PIW 1991 European Parliament. 9. Mark Mazover, Dark Continent: Europe’s Twentieth Century, London: Penguin Book, 1999.

32 33 he “Five Presidents’ with a share of almost a quarter THE SOLUTIONS Report” belongs to a genre of global foreign exchange PROPOSED BY THE “FIVE of political publication reserves”. The fact is, in this PRESIDENTS REPORT” that tends to be quickly document, one would look in vain APPEAR LARGELY Tforgotten. It would however be for any kind of critical reflection DISCONNECTED WITH a mistake to do so. The report, about the role of the euro in the THE REALITY OF THE which appeared during a period Greek, Portuguese, Spanish or EUROZONE CRISIS. IT of profound doubt with regards Italian economic crises. IS NOT CLEAR THAT to the European Monetary Union, THE THREE-POINT PLAN, PROPOSED BY makes the case for necessary But it is rife with delusion. Price ITS AUTHORS, HAS ANY changes moving forward. However, stability, for example, is not a MORE TO DO WITH THE in doing so it exposes some of the product of the eurozone but the ECONOMIC CRISIS THAN flawed thinking of the euro’s most combination of international WOULD ANY PAPAL powerful supporters. In fact, the factors that have put strong ENCYCLICAL PICKED AT “Five Presidents’ Report” restates deflationary pressure on the RANDOM. the core aims, as well as the major countries of the eurozone. In mistakes of EU supporters. The fact, we can blame the latter for report was conceived as a way removing the means in these analysis. The report acknowledges: to deliver a calming message to countries to fight against these “relative price adjustment will those concerned about the state of deflationary pressures. Similarly, never occur as quickly as exchange the EMU. Indeed it does quite the when it is claimed that the rate adjustment. And we have opposite. A careful reading of this eurozone has protected members seen that market pressures can consensus document, produced by from instability in the global deprive countries of their fiscal Martin Schulz, Jean-Claude Juncker, context, we forget too quickly the stabilizers in a slump (...) (all Donald Tusk, Jeroen Dijsselbloem, Greek and Spanish crisis and the economies) need to be able to and Mario Draghi, makes it clear slow deterioration of the Italian share the impact of shocks through that nothing has been learned from economy, which is fully on the risk-sharing within the EMU... the crisis in the eurozone. account on the eurozone. Finally, Preventing unsustainable policies when the “Five Presidents Report” and absorbing shocks individually Let us start with the beginning. raves that the euro has become the and collectively did not work well This report opens with a statement second largest reserve currency before or during the crisis”. that is difficult to dispute: in the world, it fails (a) to mention “A complete EMU is not an end the importance of the US dollar, What are the mechanisms proposed in itself. It is a means to create and (b) to compare the weight of by the “Five Presidents Report” to a better and fairer life for all euro in currency reserves with replace exchange rate adjustments citizens, to prepare the Union the weight of the old currencies of (which it acknowledges as Stiglitz has similarly just published principle of democracy: that the for future global challenges and member countries of the eurozone infinitely faster than adjustments a book entirely devoted to the risk representation of the people, the to enable each of its members before 1999. The combination of by domestic prices)? This is the that the euro poses to the European parliament—and the parliament to prosper”. 1 Duly noted: the the Deutschmark and the French key question for the eurozone, Union. 4 alone—should have the last word eurozone is not an end in itself. Franc accounted for 20% of global as evidenced by a recent study on the budget and taxes. The euro Given this sentiment, one might reserves in the early 1990s. In fact, published by the International With the Treaty on Cooperation is slowly destroying the old nations reasonably expect this report to the weight of the euro as a reserve Monetary Fund. 2 This study shows and Governance (TSCG) ratified by that built European democracy deliver a rigorous and honest currency matches, almost exactly, that the activity depends to a large François Hollande in September and threatens to turn the clock review of the situation of the the weight of the currencies of extent on exchange rate, and it also 2012, control of the fiscal and back to before 1789. Economic and Monetary Union. member countries of the eurozone shows that the exchange rate of budget process, essential elements before the creation of the euro. the euro is overvalued for France of sovereignty, are about to be The solutions proposed by the “Five However, this hope quickly 6% and undervalued by 15% for snatched from French hands. Presidents Report” appear largely evaporates. On page 4, we find The “Five Presidents Report” Germany, resulting in a 21% gap If the budget process is outside disconnected with the reality of the this startling statement: “The repeats the most commonly used between the two countries. In this the control of government, so eurozone crisis. It is not clear that euro is a successful currency disinformation about the euro. Jacques Sapir way, the euro is a danger to the is the tax process. This new the three-point plan, proposed by is professor of and steady. It is shared by 19 EU Given the list of authors, it was economics at EHESS- consensus that has developed since treaty strikes at a foundational its authors, has any more to do with Member States and more than 330 difficult to expect anything else. Paris and a well- the Franco-German Treaty of 1963 the economic crisis than would any known specialist on million citizens. It has provided But this simple fact speaks volumes the Russian economy. through to the fall of the Berlin papal encyclical picked at random. its members with price stability about the decrepit state of the He has been a Wall. Many economists now share 1. P.1. And therein lies the problem. The constant contributor and shielded them from external eurozone. this dark view. Lord Mervyn King, 2. http://www.imf.org/external/np/pp/ to the debate about eng/2016/072716.pdf euro has become a religion, and instability. Despite the recent the former governor of the Bank 3. King, Mervyn A., The End Of Alchemy: Money, the euro for the last requires its supporters to hold a five years. His book crisis, it remains the second most Even so, with careful reading, Banking And The Future Of The Global Economy, Lon- of England, has just published a dres, Little, Brown, 2016. religious discourse and display the “faut-il Sortir de l’Euro’ important currency in the world, there are some hints of critical book lambasting the euro. 3 Joseph 4. Stiglitz Joseph E., The Euro: And its Threat to the was published in 2012. Future of Europe, New Yok, Allen Lane, 31 mai 2016. same utmost observance. ■

34 35 Hans-Olaf Henkel THE EURO AND THE GERMAN MINDSET

n the last few years the Chancellor Merkel opened the The trouble is, this policy not only It is not the first time that nuclear plants, which were desire not only to save Greece EU has been forced to borders despite warnings about isolates Germany politically; it is Germany, and in particular without question the safest in the and the euro, but, according to deal with a number of the inevitable consequences. counterproductive, too. Through Angela Merkel, has tried to world. In no other country is the her own words, all of Europe! She existential crises. Angela Once the social-democratic a policy of welcoming refugees to impose questionable policies at opposition against CETA and TTIP was rolling out the same moral IMerkel plays a central role government of Sweden decided Germany, Angela Merkel incited a the expense of German citizens as widespread and as aggressive arguments that we have heard in all of them. To understand to close its borders to refugees large number of refugees to leave (and indeed, the citizens of as in Germany. Lately in Brussels, most recently justifying her actions why the eurozone crisis has and the Austrian government not only dangerous, embattled other countries), justifying them German politicians tell their in the refugee crisis: Germany has dragged on in the way it has, we officially announced a numerical parts of Syria but an unknown with superior moral standards. Polish colleagues how they have to a special responsibility for the euro must understand the mentality cap of 37.000 refugees per year, and certainly significant number Germany tries to save the world’s behave as democrats. and Europe for historical reasons. of the German leadership. Germany found itself in a new of refugees from relatively safer climate by constantly ramming When hundreds of thousands role: it succeeded Sweden as the areas in Turkey, Jordan and Iraq. German green policies down the Already in May 2010, with her If the euro fails, of refugees flooded Germany, undisputed moral champion of All of them risking their lives to throat of other European nations. first rescue package for Greece, Europe will fail, too many in Europe wondered why Europe, if not the world. get to Germany! Merkel shut down Germany’s Angela Merkel was explicit in her

36 37 - has become her mantra ever since, ignoring the fact that those EU countries that wisely decided to stay outside the common currency have done much better than those within the eurozone. When it became all too apparent that the “one time rescue effort” (Merkel) for Greece wouldn’t work and that further rescue packages would need to be sent to Ireland, Cyprus, Spain, Portugal and two additional ones to Greece, Merkel changed her rhetoric first from economic to political reasoning, and finally to a moral justification. Now, the euro had to be saved for maintaining IT IS NOT peace and for avoiding World War SURPRISING Three. THAT BRITISH CITIZENS OFTEN DON’T REALIZE Very much like Merkel’s refugee HOW MUCH policy, her euro policy resulted, THE EURO more or less, in the opposite of CONTRIBUTED what she originally intended TO “BREXIT”. to achieve. The economic and AFTER ALL, social consequences of a common THEY KEPT currency which turned out to be THEIR POUND much too strong for the South STERLING. of Europe including France and much too weak for some countries in the North of Europe including Germany, are well documented. That’s why I would like to highlight some less known side effects of THE TROUBLE IS, THESE fiscal policies. Whenever Germans Socialization of debts creates a a lack of common policies for it. to turn Germany into a moral this policy. Some of these turned POLICIES NOT ONLY shout “Solidity” across the Rhine, dangerous moral hazard. Small As a consequence, “more Europe” superpower. The trouble is, these out to be so significant that they in DAMAGE GERMANY, the French reply with “Solidarity”. wonder that the eurozone countries’ became unavoidable. But Britain policies not only damage Germany, themselves justify calling off the THEY HURT GERMANY’S In other words: rather than create economic growth figures rank as never signed up for an “ever closer they hurt Germany’s neighbours. euro experiment once and for all. NEIGHBOURS. TIME FOR peace, the euro has created distrust some of the worst in the world. Union” in the first place! In 2010 Time for Germany to take a break, GERMANY TO TAKE A and aggression in Europe. only around 3% of Britons voted and hit the couch! THE EURO FORCED ■ BREAK, AND HIT THE THE EURO for UKIP. Four years later - after 1 GERMANY INTO COUCH! THE EURO 3 CONTRIBUTED more and more centralization and THE POSITION 2 DAMAGES EUROPE’S TO BRITAIN’S EXIT harmonization—Nigel Farage’s OF A RELUCTANT of economic sense, they make no COMPETITIVENESS. FROM THE EU. party became the biggest British HEGEMON. friends. The German government party in the European Parliament! was elected by Germans, not by In order to keep the euro afloat, It is not surprising that British No wonder David Cameron felt The euro-policy put Germany into the Italians, French or Portuguese. the euromantics had to prescribe citizens often don’t realize how pressed to promise a referendum the position of Europe’s largest In 2010, before the first bailout medicine with rather serious side much the euro contributed to on British membership of the EU. potential creditor. Consequently, package for Greece, which included effects. Subsidiarity was replaced “Brexit”. After all, they kept their There are voices from within the Chancellor Merkel and her Finance many German strings attached, by centralization. Self-responsibility pound sterling. However, many Tory party which claim that the Minister Schäuble feel obliged Greeks regarded Germany their for a country’s state and banking of the above-mentioned political Brexiteers prevailed due to Angela to constantly stick their noses favourite country in the EU. debts was replaced by socialization and economic decisions related to Merkel’s refugee policy. Indeed, Hans-Olaf Henkel into the economic affairs of the Soon after, Merkel was twice in of these debts. Competition the euro were totally against what Farage and Johnson were able to is a former CEO of potential debtor countries. They IBM Europe and a Athens, and each time she had between countries was replaced the British wanted. Some of them direct the discussion on whether to asked for labour reforms in Spain, former head of the to be protected by thousands of by harmonization. Centralization were not only a violation of the stay in or leave the EU entirely on German Federation accelerated privatization in Greece, policemen. Meanwhile, Franco- makes any economic entity, be it Treaty of Maastricht but also of the immigration issues. of Industries (BDI). He pushed for less vacation time in is a member of the German relations have reached all- a company in the private sector Lisbon Treaty. Each time a new European Parliament Spain and austerity everywhere. time post-war lows, entirely thanks or a political entity, slow to react. rescue package for the euro was Both the refugee policy and euro and a Vice-President While these demands make a lot of New Direction. to differences in economic and Harmonization kills competition. assembled, the euromantics blamed policy are guided by Merkel’s urge

38 39 He was presented with two options Hollande will almost certainly lose the basis of three assumptions which to achieve this: next year’s presidential elections, have wafted from the Bundesbank: which may mark the end of the • a reduction in public worst measures of French Socialism • inflation is the worst spending, and and its destructive capital tax imaginable evil, • an increase in taxes. regime. This is a relatively new • inflation is always the development. Until now, no political result of excessive monetary Unsurprisingly, Hollande chose leader from the conservative party supply, and the track that required less has dared to roll back capital taxes: political courage: he increased neither Jacques Chirac in 1995 or • excessive money supply is taxes. This decision is the 2002, nor Nicolas Sarkozy in 2007 or caused by central banks second reason for the anaemic 2012. There is every indication that covering public deficits. performance of the French in 2017 that could change. economy under Hollande. The The fight against inflation limits the sizable tax hikes on companies But even if the 2017 elections see public deficit and forbids central and households had the effect the end of the constraints of French banks from intervening to fund it. of restricting growth. Notably, socialism on economic growth, although Hollande brought down it is less clear how the equally Today, those beliefs do not square private sector taxes in 2014 and restrictive policies emanating from with the facts. Indeed, the ECB is 2015, he continued raising taxes Brussels can be lifted. funding public deficits in the euro- on households through 2015. area with an extensive quantitative Of course, no French government, left easing policy without any inflation The truth is that the single currency or right, has fully respected Brussels’ because of an excess of savings, Jean-Pierre Vesperini is not the only cause of the low budget policies. But, at the same time, globally. The euro paradigm must growth and high unemployment no government has challenged the adapt to the new realities of the economic exigencies in France. legitimacy of those rules. global economy, namely, low THE TRAGEDY OF THE inflation and low interest rates. President Hollande has also had to The time has come, on the eve of France, which currently suffers respect other constraints, including this crucial presidential election, from weak growth and massive deeply engrained beliefs about to ask ourselves whether or not unemployment, must therefore seize the importance of capital taxes we should change this paradigm. the opportunity to undertake a policy as bulwarks of French socialism, There are at least two reasons of economic recovery, predicated on which have been passed down why the French people ought to increasing the public deficit to fund from François Mitterrand. These seriously reconsider how they investment, and decreasing taxes. capital taxes not only frighten off respond to EU economic dictates. investment but also innovators and Increases in the public deficit must entrepreneurs. First, the French economy is be coupled to structural reforms characterised by excessive tax aimed at lowering social spending, pressure both on the private sector especially on retirements. ■ EMU and on households. Any plan for THE EURO PARADIGM AND A CALL FOR A NEW MUST ADAPT TO THE renewed economic growth in NEW REALITIES OF THE France would require a whole GLOBAL ECONOMY, new tax policy. In constructing a FRENCH PARADIGM NAMELY, LOW INFLATION new tax regime and fiscal policy, AND LOW INTEREST it would be impossible to respect he trouble is, France’s halfway into 2016 unemployment the dream of a completely federal RATES. FRANCE, Brussels demands every step of the president Francois increased from 9,7% to 9,9%. In that Europe in which the euro would WHICH CURRENTLY way—those rules will have to be Hollande’s mandate same period, unemployment in the reign as the single currency. For SUFFERS FROM WEAK broken at least in the short term. is ending in complete EU dropped from 10,4% to 8,6%. this reason, he is convinced of the GROWTH AND MASSIVE Hence, if a newly elected French Tfailure and embarrassment. This Even in the euro-area it fell from necessity to respect the rules of the UNEMPLOYMENT, MUST government is to take on serious THEREFORE SEIZE pro-growth policies, it will have to is true for a variety of reasons, but 11,3% to 10,1%. Stability Pact that requires each Jean-Pierre Vesperini most relevantly, because of his member to keep public deficits THE OPPORTUNITY change its approach to Brussels. is a professor of TO UNDERTAKE A economics. He taught astonishingly poor record with the There are two underlying reasons under 3% of the GDP. at l’Institut Catholique POLICY OF ECONOMIC Second, and more generally, the economy. Hollande managed to for Hollande’s failure. RECOVERY, PREDICATED de Paris, Sciences Po increase unemployment in France at Thus, to satisfy the EC, he radical shift in the global economy Paris, HEC. He was a ON INCREASING THE (and specifically in the Eurozone) member of the French a time when it decreased both in the The first is his unquestioning embarked on a plan to reduce the PUBLIC DEFICIT TO Prime Minister’s EU and the euro-area. Between the acceptance of European federalist public deficit in the fall of 2012 to calls for a new paradigm. At present, Council of Economic FUND INVESTMENT, AND Analysis. beginning of his term in 2012 and dogmas. Hollande is committed to 3% in 2013. DECREASING TAXES. all euro-area governments operate on

40 41 Joachim Starbatty make use of idle resources until significant devaluation of re- its currency. He came to a clear market demand picks up again. established national currencies. conclusion: the right policy for However, government spending In some cases, a debt write-off countries is to devaluate, and to A TRUE KEYNESIAN PERSPECTIVE ON THE will not achieve an efficient will be needed. The German find an appropriate value of the allocation of production factors, government knows of course about currency to which commerce when there were none to begin the false relative price and forces and wages are adjusted. Hence, with. In short, it cannot resolve the the governments of the Southern countries should pursue an problem of underlying economic periphery to devalue internally external devaluation, i.e. an uncompetitiveness. Also, large- by lowering wages because adjustment of their exchange scale public spending would of increasing unemployment, rate, instead of an internal EUROZONE require more public debt, which austerity policy and diminishing devaluation in form of wage cuts. in many countries is already imports. We can learn in detail If Keynes lived today, he would unsustainable. from Keynes what happens to recommend a Grexit and the exit governments that follow the recipe of other countries in economic In Keynes’ “General Theory,” we of German Chancellor Angela depression. A return to national do, however, find a suggestion Merkel. In his “Tract on Monetary currencies would also restore CRISIS that an economy can fight against reform” (1923) he harshly criticised individual countries’ power over unemployment by manipulation the deflationary policy in France to their monetary policy, which could of its exchange rate. A government protect an overvalued franc. After finally align with the needs of faced with high unemployment the Great Depression, Britain and each respective national economy. can stimulate employment by the U.S. heeded this advice and Locking Germany and Greece devaluing its currency, which abandoned the gold standard. The together in one monetary policy translates to exporting more British pound and the US dollar was doomed to have disastrous goods and importing employment. depreciated, and they became consequences. The current Consequently, trade situation is not a surprise, counterparts import THE EURO IS A SYMBOL FOR EVER- but a logical extension of the more goods and export CLOSER UNION. THEREFORE, IT IS European Monetary Union. employment. The DEEMED POLITICALLY “INCORRECT” IN catchphrase for this THE EU-ESTABLISHMENT TO QUESTION Why does the political elite strategy is “Beggar-my- THE EURO’S CURRENT FORM, DESPITE in the European Union neighbour-policy”. And THE IMMENSE SOCIAL COSTS IN refuse to even talk about this is what is happening SOUTHERN EUROPE. the notion of a country in the eurozone. The exiting the eurozone, let currency union’s main problem is more competitive than France. alone develop a long-overdue legal a false relative price: The value of The French government faced the framework for such an event? the euro is too low for Germany choice of either depreciating as The only answer is: The euro is and too high for the countries well, or to pursue a deflationary now about ideology. The euro is of the Southern periphery. In policy of spending cuts in order a symbol for ever-closer union. Germany, the surplus in the to regain competitiveness. Keynes Therefore, it is deemed politically balance of payments has increased observed that “not even a reckless “incorrect” in the EU-establishment from 1 percent in 2000 to more politician should pursue a policy to question the euro’s current form, than 8 percent now and the that is to halve wages, double the despite the immense social costs in unemployment rate has fallen from burden of the national debt and Southern Europe. ■ 11 in 2005 to 5 percent at present, to drastically reduce the prices whereas the unemployment rate in obtained for exports.” Sound the Southern periphery has nearly familiar? The troika and politicians doubled. That is clear empirical from Europe’s creditor countries proof of a “Beggar-my-neighbour- have implemented precisely this policy”. It makes sense that German policy for six years. So, even if exporters are content with the euro increasing government spending he remedy of John south. But for the countries at capacity and workers could be put regime; but it is incomprehensible cannot solve the crisis, cutting Maynard Keynes—that the euro-area’s periphery, this to use with government spending. that the governments of countries expenditure, pensions and wages governments should approach would not provide a What he does not discuss at all in the Southern periphery stick to only make matters worse. increase spending to reliable path back to growth. is competitiveness, which is the a monetary system that is ruining Joachim Starbatty is Tstimulate economic recovery in In his epoch-making book “The heart of the problem facing the their respective countries. Keynes dedicated a whole chapter professor emeritus at the University a recession—is often proposed as General Theory of Employment, eurozone’s crisis economies. Deficit of his “Tract” to the question of of Tübingen. He is a solution for the overindebted Interest and Money” (1936) Keynes spending must be understood as There is only one road for them to whether a nation should pursue a Member of the European Parliament. countries of the eurozone’s demonstrated that idle production a bridge. Keynes offers a way to come back to economic prosperity: deflationary policies or devaluate

42 43 David Liebers UKRAINE THE UNNAMED VICTIM OF THE EUROZONE CRISIS

As for you, my dear Ukraine, Widow without fortune… I shall fall to you at midnight… Then together we’ll take counsel, grieving for our woe. – Ukrainian poet Taras Shevchenko, The Dream

44 45 pologists for the As a result of this new political striking 14-point margin in the UKRAINE WAS AT The case of Romania demonstrates state. Both took criticism from European single balance, Europe is suffering a Dutch national plebiscite signaled a THE CENTER OF that EU-backed anti-corruption nationalists in their respective currency often fall back defeat in its most significant decisive European turn away from WHAT HISTORIAN efforts can be crucial in facilitating countries for doing so, but the on this defense: “the geopolitical test since the 1990s: its eastern neighbor. TIMOTHY SNYDER a transition towards a political agreement represented real euroA was from the beginning a Ukraine. FAMOUSLY CALLED THE culture based on the rule of law. opportunity for a free Ukraine political not economic project, so The symbolism could hardly have “BLOODLANDS” OF THE European pressure helped Romania to emerge and was an early we should not allow economic Fragile economic conditions been plainer: the Dutch rejected 20TH CENTURY—THAT build transparent institutions, and manifestation of what would now setbacks to change our views.” and high unemployment in the very same agreement for which GEOGRAPHIC BAND it can help Ukraine. be called “European solidarity.” the eurozone have sharpened a generation of Ukrainians have OF EASTERN EUROPE That possibility collapsed as the THAT SUFFERED MOST This justification—as fatuous as it populists’ message and increased fought, and in some instances, died. GREATLY AT THE HANDS Moreover, the crisis in Ukraine Soviets prevented the formation is popular—betrays a dangerous voters’ skepticism about Europe’s OF TOTALITARIANISM. is not like the crisis in Greece— of an independent Ukraine at the assumption about politics and ties with its neighbors. Across the Geert Wilders, the hard-right, LIBERATION OF UKRAINE although each affects the other. conclusion of the Polish-Bolshevik economics existing as independent continent these are good times for populist leader of the Dutch Party FROM ITS TRAGIC FATE Greece is suffering because of the war in 1921. The Western powers spheres, one walled off from the populist politicians of all stripes. for Freedom, led the campaign IS STILL POSSIBLE. single European currency, and will did not intervene to help Ukraine other. The truth is that just as against the agreement. He continue to do so until European in 1920. Now, again, the fate of the political decisions affect economics, This shifting political mood explained his position to the leaders muster the courage to country will be depended up to a economic conditions can, in turn, helps explain why, in April, the Kremlin-funded Russia Today this vote was an opportunity for oversee a controlled breakup of the large point on how the West reacts. have political consequences. Those Netherlands voted against the television network in this way: a surging isolationist, populist eurozone. Ukraine, on the other that fail to heed this fundamental European Union’s proposed “the Dutch voters don’t want to force in Dutch politics to express hand, is struggling to sketch out Ukraine was at the center of what point will also fail to understand association agreement with spend any more money on… or its hostility towards the EU and a path towards a future more in historian Timothy Snyder famously that Europe’s present economic Ukraine, which would have seen have any more immigrants from wariness about its expansion. line with the political and cultural called the “Bloodlands” of the malaise, rooted in the euro, has deeper political integration and a those countries.” Dutch voters values of the Europe, rather 20th century—that geographic fueled the shift towards populism free trade area without Ukraine do not have any special enmity If the same referendum were than one tied to Vladimir Putin’s band of Eastern Europe that across the continent. actually joining the Union. The for Ukraine or its people. Rather put to the people of other Eurasian Union. To abandon those suffered most greatly at the hands Western European countries it is with democratic-values in Ukraine of totalitarianism. Liberation of increasingly likely that the outcome is to vindicate Putin’s gamble that Ukraine from its tragic fate is still would be the same. After successive annexing part of another European possible. Events in 2014 offered bailouts across the continent’s country would not be met with a a new chance for Ukraine. Yet, economically despondent south, serious response. Europe seems prepared to discard many Europeans are unwilling this latest opportunity to guide to support the kind of economic Ukrainians who took serious risks Ukraine’s fate. Ukraine does not assistance necessary for stabilizing for change have been let down by deserve to be sacrificed on the Ukraine. George Soros observes the politicians who promised them altar of the euro, but it has become that Ukraine has been treated like a new Ukraine, and now they are difficult to imagine any other a “second-class Greece,” which in danger of being left behind by possible conclusion. ■ will ultimately lead Europe to turn a new Europe: one of populism, the “new Ukraine back into the isolationism, and vulnerability. old Ukraine.” Ukraine needs its Today, Ukraine is just one symptom own Marshall Plan, and far more of this new Europe’s geopolitical debt reduction than was offered in impotence. 2015. But if the EU is to be a serious partner for Ukraine, it needs If Europe chooses to abandon to return to a path of economic Ukraine, the stakes are high. This growth and security itself. is true because historically, there have been so few opportunities for Doubtless, there is much to blame Ukraine to make a serious political on Ukrainian politicians who bid to join the European family of have not delivered on pledges to nations. root out endemic corruption. This David Liebers serves on the board of has provided an easy excuse for The last chance was in 1920. the Warsaw-based Europeans to turn their backs on Against the background of the Democratic Initiative Ukraine. The prevailing view is collapse of the Russian empire, Foundation. He is a Humanity in Action that that “a corrupt Ukraine is not Polish and Ukrainian leaders Józef Senior Fellow and was worth the investment and political Pilsudski and Symon Petliura laid previously a Gates- Cambridge Scholar in risk, especially given the disastrous the basis for a political and military the History of Science eurozone saga.” This betrays a partnership that allowed them to at Trinity College, Cambridge, and complete misunderstanding of momentarily repulse incursion Fullbright Scholar in what EU leadership can mean. by Russia’s new Bolshevik Soviet Warsaw, Poland

46 47 n his book “The Euro: The was not born as a result of positive endangers the whole EU project, Pieter Cleppe Politics of the New Global experiences with fixed exchange may emerge as a result of events. Currency”, David Marsh rates or of some ideological When Spanish banks got in trouble shows that the drive to forge consensus. There were many in 2012, frightened Northern Ia common currency in Europe opponents, not least in Germany, European politicians provided was animated by the traumatic but also in France, where almost Spain with a 100 billion euro experience of the break-up of half of the population voted against bailout, they could only get away the Bretton Woods agreement the Maastricht Treaty, which with this move, politically, by in 1971, when the US declared it provided the euro’s framework. ensuring that the bailout had would default on its obligation to Rather, the euro emerged because strings attached. In this case, the exchange the dollar reserves of it allowed politicians to postpone strings amounted to a concession European nations for gold. painful decisions and in some that a eurozone framework for BR€XIT cases even outright state defaults. financial supervision would THE EURO’S FIRST MAJOR BLOW At the beginning of the 1990s, a When politicians were desperately be created, parallel to the EU system of fixed exchange rates was scrambling for ways not to have framework, to supervise Spanish TO THE EUROPEAN UNION? in place in Europe, in preparation to cut spending in the 1990s, and other eurozone banks. The ECB for this planned common currency. they eventually discovered that was entrusted with this task, and In 1992, investor George Soros deciding to create a common thereby directly ended up in direct made a lot of money as his currency allowed them to kick competition with an existing EU speculation forced the British the can down the road. As the US banking watchdog, the “European government to pull the pound dollar has proven for decades, a Banking Authority” (EBA) in from the European Exchange London. Rate Mechanism (ERM). Soros SIMILARLY TO THE EURO understood Germany would not be CRISIS THAT WOULD One can imagine that after yet willing to take extreme measures to COME LATER, THIS another round of bailouts and keep Britain in the ERM, an insight HUMILIATING CHAIN further, stricter prescriptions for lost on many in the City of London. OF EVENTS DID NOT banks, eurozone banks may start STOP THE BIG PROJECT to lobby to exclude competitors Similarly to the euro crisis that FROM PROCEEDING. THE who enjoy market access in the would come later, this humiliating 10 YEAR BORROWING eurozone without having to comply chain of events did not stop the big COSTS OF STRUGGLING with ECB rules. In short: common project from proceeding. The 10 EUROPEAN COUNTRIES eurozone rules might easily serve year borrowing costs of struggling SUCH AS ITALY, SPAIN OR as an excuse for keeping out European countries such as Italy, BELGIUM CONTINUED external non-eurozone competition Spain or Belgium continued to TO STAY HIGH OVER THE in the future. The aftermath of the stay high over the next few years. NEXT FEW YEARS. Brexit vote and the many warnings No half-hearted budget cuts, gold from the continent about Britain sales or tax hikes succeeded in large currency zone affords more losing its single market access hint bringing them down. The only mismanagement, in terms of loose at the underlying desire to kill measure that lowered borrowing budgetary or monetary policy, than off competition from outside the costs was the decision to create a small currency zone. eurozone. a common currency. In 1995, investors became convinced that Just as the euro was pushed The ECB has proved not to be the common currency would be through despite the opposition of immune for the protectionist virus. a reality and that Italy and other a large part of the political class, Already a few years ago, it tried to weaker European economies it has now given rise to a transfer force clearing houses to relocate would become members. This is union, despite the reluctance to the eurozone if they wanted to evidenced by the fact that this of both Northern European continue clearing in euros. This was the last peak before which politicians, who had to defend to attempt at grabbing business from borrowing rates dropped off the system of transfers to their London failed and the ECB had precipitously. For each of the taxpayers, and Southern European to back down, thanks to Britain’s eurozone’s member states, the politicians, who had to accept the EU membership, which allowed prospect of entering the common conditions and foreign interference the UK government to exert some currency zone resulted in a drastic linked to the transfers. pressure. reduction in borrowing rates. Just as the common currency As Britain leaves the European Why does this matter? It matters emerged unintentionally, also Union, further, more aggressive, because it explains how the euro eurozone protectionism, which attempts will likely be made to

48 49 export eurozone rules outside of make a choice: will it only bail out the euro. It is related to the nature did in Greece, where anti-German the full erosion of savings in the ever-centralising bureaucracy the common currency zone. This its own banking system or will it of our fractional reserve banking sentiment was rife during the eurozone in order to save the and helping to prop up virtually in turn will likely boost anti-EU bail out the banking systems of the system, whereby banks are allowed eurocrisis, which even led to a euro-project, but this isn’t likely, bankrupt European welfare states. sentiment in Denmark, Sweden Benelux, Austria, France and Italy to only keep a fraction of the funds Greek Parliamentary investigation given the current German hostility Without the eurocrisis, which gave and Poland, which may have their as well? The German government they owe to their clients in reserve. aimed at pushing for German against such payments. Some the EU such a bad reputation, the financial institutions barred from would not have more than a few This is a means by which the total World War II reparation payments. may think that common eurozone British may well have voted to stay, the eurozone market. Once the hours to make this choice. Perhaps amount of money in circulation joint debt issuance may save the despite concerns about freedom of EU’s free movement of capital is on the next two occasions when can be expanded, which drives Why should the EU break up eurozone, but this overlooks the movement. Brexit is just the first damaged, it is only matter of time it has to make this choice, it will down the price of money, also when the euro collapses? There fact that the ECB has been the big blow the euro has inflicted on before the freedom of known as the interest is no reason that it should, but crucial actor in propping up the the European Union. movement of services, GIVEN THE SERIES OF EURO CRISES THAT rate. This in turn politicians like Angela Merkel have currency zone, precisely because persons and goods WILL CONTINUE INTO THE FUTURE, AND allows governments linked the two together, in order to there was no political support At the moment, elites in Berlin, comes under fire. WHICH EVENTUALLY MAY LEAD TO ITS to refinance their old get away with eurozone bailouts. for doing bailouts in a more Paris and Rome still believe they DEMISE, IT IS NOW CRUCIAL TO MAKE loans more cheaply, so In 2011, she said: ‘If the euro falls, transparent manner, through will manage to save the euro Still the differences THE CASE FOR AN ARRANGEMENT IN they can avoid raising Europe falls’. One can only hope the eurozone’s lending schemes, project through a “transfer union”, within “old Europe” EUROPE THAT SECURES THE RIGHT TO DO taxes. The unsustainable people understand that to have such as ESM and EFSF. According despite the fact that the large are quite material BUSINESS AND MOVE CROSS-BORDER, investment following a common currency is different to prominent German economist eurozone transfers since 2010 (and and this itself may AND MAKE SURE THIS GREAT PART OF excessive creation than to have a treaty whereby Hans-Werner Sinn, the ECB has before, through the ECB) have done be the reason for a EU COOPERATION ISN’T TAINTED BY THE of money produces countries promise not to impose provided for about 75% of the little to mitigate the crisis. Given hypothetical future EU FAILURE OF THE EURO. investment bubbles trade barriers upon each other. bailouts in the eurozone. the series of euro crises that will break up. It is unlikely and financial crises. When banks close and people lose continue into the future, and which that the far right in France or the again decide to bail out the whole When these appear in Japan or the considerable parts of their savings Alternatively, we could see moves eventually may lead to its demise, populist left in Italy will manage of Europe. Perhaps the German United States, the odds are high that message may be a hard sell towards a world currency, in the it is now crucial to make the case to convince the citizens of those government will go much further that the respective governments and human folly may rule the day. framework of the IMF’s “Special for an arrangement in Europe that countries to leave the euro by than anyone can now imagine— will bail out the whole currency Drawing Rights” (SDR). In the same secures the right to do business and referenda, because of fears that but at some point, enough will be zone, even when this means they Still, one shouldn’t be overly way that the decision to create move cross-border, and make sure savings would be ruined in ensuing enough. have to impose significant financial pessimistic. Already now, many the euro effectively bailed out this great part of EU cooperation banking crises. If the euro does repression. In Europe, this is more have understood that to have struggling European welfare states, isn’t tainted by the failure of the blow up, it will likely be the result Why would there be financial crises difficult, given that the burden savings in the bank is a risky the debt-crippled industrial nations euro. Otherwise, the enemies of of some financial event, not a forcing the German government to wouldn’t be suffered evenly across undertaking, and that it’s probably of today may get a few decades free and open trade will happily political one. Such a scenario would make such a choice? The answer the monetary union. Nationalism a good idea to shift a part of one’s respite as a result of beefing up seize the occasion to kill the EU, force the German government to to this question is not just about would pop up as violently as it wealth into hard assets like real the SDR system. US economist Jim alongside with the euro. ■ estate, stocks and physical gold Rickards suggests that the world’s and silver, despite the fact that bad debt could be rolled up into also these investments come the Special Drawing Rights (SDR), with great volatility and risks. which he thinks is also why China Today in 2016, only a tiny part has been buying SDRs on the of services are compensated in market. private “cryptocurrencies”, of which Bitcoin is the most popular, Of course, there are two sides to but this will only grow. This kind this coin, and savers would pay of currency has proven to be very the price for such a move. Perhaps volatile and risky, but at the same there may simultaneously be time they have proven to be a moves to reboot the system. There very effective way to avoid capital may be “bail-ins” or operations Pieter Cleppe is the Head of the controls, while the technology to recapitalize banks through the Brussels office of behind bitcoin, blockchain, has shrinking of the money supply, Open Europe. Pieter previously practiced now been adopted by major banks. similar to what happened right law in Belgium, and If in 20 years time, one third of after World War II. has worked as a cabinet advisor and transactions would be in private speechwriter to the currency, a breakdown of the Britons had a lot of reasons to Belgian State Secretary public money system in Europe vote to leave the EU. What they for Administrative Reform. He received may be much less traumatic than it most certainly did not like, was his legal training at the would be today. that the club which was supposed Catholic University of Leuven, and also to be about scrapping trade studied economic Another alternative is of course barriers turned out to be a club analysis of law at the universities of that we could just see the German mostly centred around a common Hamburg, Bologna government effectively allowing currency helping to boost an and Vienna

50 51 Stefan Kawalec PROLONGED STAGNATION IN SOUTHERN EUROZONE THE EUROZONE COUNTRIES AND THE DANGER 1 OF GLOBAL CURRENCY WARS THE DISASTROUS economists and politicians have southern countries diminished IMBALANCES CONSEQUENCES called on the ECB to weaken the or disappeared as a result of the OF AN INTERNAL euro in order to improve the economic recession and a weaker DEVALUATION POLICY situation in struggling eurozone euro. At the same time, current AND GLOBAL TRADE member countries. Ultimately, in account surpluses in countries like In 2010, when the eurozone crisis the middle of 2014, a combination Germany increased, causing the erupted, it was estimated that in of factors such as European Eurozone’s overall surplus to swell. order for the southern EU countries quantitative easing (QE), the In 2015, the eurozone’s current (such as Greece, Italy, Portugal, and introduction of negative deposit account surplus of 330 billion Spain) to regain competitiveness interest rates by the ECB, US QE euros (USD 366 billion) or 3.6 CONFLICTS tapering, the prolongation of the percent of its GDP was, for the third and repair their trade and current he euro is a problem not only for Europe but account balances, they needed to eurozone crisis and a revival of consecutive year, the largest among also for its trading partners, and the whole bring their wages down by 20-30% the US economy resulted in the the world economies, including global economy. The eurozone’s inability to in relation to wages in their trading beginning of a slide of the euro. China. The eurozone became a liquidate internal imbalances, together with partners. However, the eurozone The euro exchange rate decreased main source of global imbalances. Ta very tense social and political situation in crisis-hit countries in crisis cannot improve from the monthly average of $1.37 countries, is forcing it to desperately try to generate their competitiveness through in May 2014 to $1.08 in March 2015 THE DANGER OF trade and current account surpluses. This is likely to be a currency depreciation. Instead they and over the next few months, it GLOBAL TRADE permanent situation which, given the eurozone’s leading have been trying to implement a so fluctuated near this reduced level. CONFLICTS position in the world economy, will have a detrimental called “internal devaluation” which impact on other countries and thus may spark global is the contemporary equivalent CURRENT ACCOUNT In the entire global economy, both currency wars and inhibit international trade. of the deflation policy applied SURPLUS IS HIGHER the current account and trade are during the Great Depression in the THAN IN CHINA by definition balanced. Therefore, A controlled dismantlement of the eurozone would be 1930s in order to defend the gold maintaining huge surpluses in beneficial for its crisis-hit members and for Europe’s standard system. The scale and In 2010, when the eurozone the eurozone means that other trading partners, and - contrary to appearances - also duration of economic collapse in crisis erupted, France and the economies in the world must for Germany. 1 the crisis-hit eurozone countries is eurozone’s southern countries have significant current account comparable to and in some cases such as Greece, Italy, Portugal and and trade deficits, which results even greater than it was during the Spain, had an aggregate current in slower economic growth and Great Depression. account deficit of 159 billion euros. higher unemployment. Taking This deficit was counterbalanced into account the great size of the IN A WEAKENING by a surplus of 145 billion euros eurozone economy, and the scale THE EURO WE TRUST in Germany, as well as surpluses of its international surpluses, in the Netherlands and Ireland. Europe’s trading partners are 1. This article draws from the following texts: • S. Kawalec and E. Pytlarczyk, Controlled Dismantlement of the Eurozone: A Strategy to Save the European Union and the Single European Market, “German Econom- Many observers noted that a Altogether, the eurozone had a unlikely to tolerate such a situation ic Review”, 14 (1), February 2013, p. 31-49. small current account surplus of for long. If eurozone surpluses • S. Kawalec and E. Pytlarczyk, Controlled Dismantlement of the Eurozone: A Proposal for a New European Monetary System and a New Role for the European Central weakening of the euro could be Bank, National Bank of Poland Working Paper No 155, Warsaw 2013. http://www.nbp.pl/publikacje/materialy_i_studia/155_en.pdf. the most effective macroeconomic 36 billion euros (USD 48 billion) or continue, sooner or later they will • S. Kawalec, Europe’s Currency Manipulation, „Project Syndicate”, http://www.project-syndicate.org/commentary/euro-currency-manipulation-by-ste- fan-kawalec-2015-04, 2 April 2015. tool via which the European 0.4 percent of its GDP. spark an international trade war • S. Kawalec, The permanent necessity to undervalue the euro endangers Europe’s trade relations, Paper for 12th EUROFRAME Conference on Economic Policy Issues Central Bank (ECB) could help the with dire consequences for Europe, in the European Union „Challenges for Europe 2050”, organized by the EUROFRAME group of research institutes, Vienna, Austria, 12 June 2015. • S. Kawalec, The Euro as a Threat to European Integration, “That Sinking Feeling”, New Direction – the foundation for European reform, Autumn 2015, p. 6-9. eurozone’s struggling member In the following years, current its trade partners and the whole • S. Kawalec and E. Pytlarczyk, Paradoks euro. Jak wyjść z pułapki wspólnej waluty (The Euro Paradox: How to Break Out of the Trap of a Common Currency?), Pol- account deficits in the eurozone’s global economy. text, Warszawa 2016. countries. On many occasions

52 53 FALSE HOPES population and level of economic Jean Blanchard and Lawrence F. city. Detroit’s population decreased development. They conclude Katz, 2 the factor that solves the by 62 percent - from 1,850,000 in FOR FIXING THE that since the US economy can problem of higher unemployment 1950 to 700,000 in 2013. The city’s EUROZONE’S INTERNAL operate successfully with one in distressed US regions is not problem is not unemployment, currency, the same could happen “internal devaluation,” i.e. but a low number of inhabitants, IMBALANCES in Europe, provided the eurozone’s local wage adjustment, but the who are unable to finance local 2 architecture is adequately emigration of people of working infrastructure. As a result, Detroit GERMANY IS UNLIKELY hard-won competitiveness gains 25% of regional GDP in eastern enhanced. age to other parts of the country. filed for bankruptcy in 2013. TO VOLUNTARILY is not an option. The fact that 63% Germany – the Italian and German The strengths of the American DESTROY ITS of German exports go to countries economies have gained little. However, the American way of adjustment mechanism (as well In Puerto Rico, which is HARD-WON outside the eurozone – meaning dealing with regional imbalances as some of its extreme effects) can a US dependent territory, COMPETITIVENESS that German companies must In fact, an attempt to improve the would be hardly acceptable for be seen in the cases of Detroit and unemployment has long been be able to compete with their competitiveness of depressed areas European countries. Some US Puerto Rico, as described by “The constrained by emigration. The states and territories have been Economist”. 3 territory is now inhabited by 3.5 An unsolvable problem for the counterparts all over the world, not within a currency union through permanent recipients of net federal million people, while 5 million, i.e. ECB is that the euro remains just in the monetary union – makes fiscal transfers is a contradiction transfers exceeding annually Detroit, the former capital of the 59 percent of Puerto Ricans, live in too strong for the depressed the issue even more sensitive. in itself. The inflow of funds 10 percent of local GDP. Those American motor industry, has lost other parts of the US. The shrinking southern countries and too weak to countries that are trying to transfers do not help to resolve thousands of jobs. However the economy and population, however, for Germany. While allowing it to PROGRESS TOWARDS A regain competitiveness through problems of non-competitiveness unemployment level in the city are no longer able to finance the appreciate would help to reduce FISCAL UNION WOULD an internal devaluation policy of recipient states and territories, (5.7 percent in 2015) is only slightly obligations of Puerto Rico. “The the current-account surplus, NOT HELP only undermines this very policy. but simply provide resources to higher than the American average, Economist” claims that sooner it would also exacerbate the While an internal devaluation finance the deficits resulting from and substantially lower than in the or later, the federal government economic distress in the depressed Other observers claim that further policy intends to diminish domestic those problems. As demonstrated eurozone (10.9 percent in 2015). This will have to take over some of the southern countries. This, in integration, especially progress demand in order to decrease in the classic study by Olivier is because inhabitants have left the island’s debts. turn, would further strengthen towards a fiscal and political prices and wages, incoming fiscal the populist and anti-European union, would provide the zone transfers boost domestic demand political movements that have with alternative instruments – and contribute to wage and price capitalized on social hardship to namely, wealth transfers – to increases, and thus make it more WITHIN THE EUROPEAN UNION, win support. improve depressed countries’ difficult to regain competitiveness. THE OPTIMUM COMMUNITY competitiveness. But, as Italy and Some observers believe that the Germany have learned in their THE AMERICAN LEVEL FOR A CURRENCY AREA eurozone’s internal imbalances can largely failed (and extremely EXPERIENCE DOES IS THE MEMBER STATE be reduced if Germany increases expensive) efforts to stimulate NOT PROVIDE ANY 3 infrastructure spending and uncompetitive regions, such HOPE EITHER allows wages to rise faster. But for expectations are unjustified. NEITHER LONG-TERM have the best possible chances it is rational that the power to use many Germans, who withstood Indeed, despite spending huge Supporters of the euro often STAGNATION NOR for personal development and this instrument should be located difficult social-security and labor- amounts of taxpayer money – point to the United States, which MASS EMIGRATION well-being in their own countries. at the level of the community at market reforms in 2003-2005, amounting annually to 16% of is similar to the European Union ARE ACCEPTABLE Neither long-term stagnation nor which citizens identify most, and a deliberate effort to diminish regional GDP in southern Italy and (EU) in terms of total area, SOLUTIONS FOR THE mass emigration are acceptable to which they are prepared to EUROPEAN NATION- solutions for Europe’s nation- delegate responsibility for their STATES states. In addition, permanent fate. In the case of the European fiscal transfers financing the Union, the optimal community Europe consists of countries with deficits of some nation-states are level for a currency area is the different languages characterized hardly an acceptable solution in member state. Within a nation-state, by different historical and the eurozone, as evidenced by a both migration and permanent cultural traditions. Nation states report by presidents of five leading fiscal transfers are not politically constitute the major source of European institutions. 4 disruptive and could be acceptable. citizen identity; they also serve as the source of governments’ In emergencies, exchange rate Depriving member countries of democratic legitimacy. For the change is an effective and basically their currencies may, contrary to cohesion of the European Union irreplaceable adjustment mechanism intentions, menace the future of and its member states, it is that improves the competitiveness the EU instead of fostering further important that European citizens of a given currency area. Therefore, European integration.

2. O. J. Blanchard, L. F. Katz, Regional Evolutions, „Brookings Papers on Economic Activity”, 1:1992. 3. „The Economist”, For richer, for poorer: One way or another, America’s government will end up bailing out Puerto Rico, November 28, 2015. 4. The presidents of the European Commission, the Euro Summit, the Eurogroup, the European Central Bank, and the European Parliament, presented cautious prelimi- nary ideas for the Eurozone budget under the euphemistic term of “a euro area fiscal stabilisation function”. They however stated that: “It should not lead to permanent transfers between countries or to transfers in one direction only ... It should also not be conceived of as a way to equalise incomes between Member States.” See: The Five Presidents’ Report: Completing Europe’s Economic and Monetary Union, report by: Jean-Claude Juncker in close cooperation with Donald Tusk, Jeroen Dijsselblo- em, Mario Draghi, and Martin Schulz, The European Commission, 22 June 2015, p. 15.

54 55 EUROZONE DISMANTLEMENT COULD BE BENEFICIAL NOT ONLY FOR CRISIS-HIT EUROZONE 4 MEMBERS BUT ALSO FOR EUROPE’S TRADING PARTNERS, AND FOR GERMANY A CONTROLLED return to national currencies DISMANTLEMENT OF A CONTROLLED A EUROPE WITH THE EUROZONE WOULD DISMANTLEMENT NATIONAL CURRENCIES in Europe would have negative ALLOW GERMANY TO OF THE EUROZONE COULD HAVE BETTER consequences for Germany, as SOLVE THE PROBLEM COULD IMPROVE TRADE RELATIONS the new German currency would OF A PERSISTENT TRADE THE SITUATION OF WITH THE REST OF THE appreciate, causing the country’s SURPLUS IN A GENTLER SOUTHERN COUNTRIES WORLD trade surplus to shrink or even AND SAFER WAY THAN turn into a deficit. Michel Pettis OTHER POTENTIAL In order to save the European According to a popular view, the EU argues however that Germany’s METHODS. Union and the common needs a single currency to operate huge trade and current account market, the eurozone should successfully in the world economy surplus is unsustainable. Sooner be dismantled in a controlled among big players like the US, or later Germany will have to trade surplus indefinitely. If the (b) Doing it by fiscal expansion In (b), by remaining in manner. Eurozone segmentation China and India. However, the undergo an adjustment process economy itself is unable to reduce and the relaxation of wages in the eurozone and having conducted in the most obvious single currency forces the eurozone which would reduce its surplus this surplus, sooner or later this Germany (which was disqualified uncompetitive wages, Germany way i.e. via the exit of less to try to desperately generate trade at the cost of slower economic will happen as a result of changes in part II of this article). would be sentenced to a painful competitive countries could and current account surpluses, growth. The severity of this in the policies of its trade partners ‘internal devaluation’ therapy, result in bank runs and the which could spark currency wars adjustment will depend on the or changes in the world economic Both methods are expected to which could mean years of collapse of the banking sectors in with its main economic partners. circumstances. If an adjustment situation. An inflexible economy, result in an increase in German economic stagnation and high these countries. Therefore some is forced during the global dependent on trade surplus, wages, as denominated in the unemployment. economists propose a different If the eurozone countries returned downturn, it can be very severe. in this case is the most likely currencies of the foreign trading scenario, in which the eurozone to their national currencies, linked Pettis gives the example of France, to undergo a hard landing that partners. However, in (a), this Historical experience shows that is dismantled from the other end through adjustable currency bands, which in 1930 had a high trade would mean recession and rising would happen via the appreciation the German economy managed via the gradual exit of the most trade and current account deficits surplus and low debt. It was unemployment. Currently, the of a new German currency, while to develop very successfully, competitive countries. 5 Along in countries in crisis could be thought therefore that it would risk of a hard landing threatens in (b), via a nominal increase increasing labor productivity with the segmentation of the eliminated. This could be achieved be resistant to a forthcoming the Chinese economy, which in wages across the German and wages while maintaining eurozone, a new mechanism for by balancing imbalances among worldwide depression. But raises concerns and anxiety economy. its competitiveness, during the currency coordination should present eurozone members, without it turned out differently and around the world. One day, a continuous process of currency be established in Europe aimed generating a huge surplus by the France suffered during the hard landing will also threaten A big difference between these appreciation. The German economy at preventing currency wars as eurozone as a whole, and thus Great Depression of the 1930s Germany if it fails to reduce its two methods would appear if, has proved that it is able to deal well as the excessive appreciation without causing an overall negative disproportionately more than trade surplus by itself. at some point in the future, well with currency appreciation, of the new German currency. trade effect in Europe’s trading other countries. wages in Germany become provided of course that it happens The proposed segmentation of partners. This would be more It is worth analyzing, from the uncompetitive (which may be within the limits set by differences the eurozone would enhance advantageous to Europe’s trading A permanent trade surplus is perspective of Germany, the caused by various factors and in productivity increases versus the competitiveness of the partners than the ‘defending the not a buffer that protects an difference between two options processes happening in Germany trading partners. Over the last 60 southern countries via currency euro at all costs’ situation, in which economy from the effects of for reducing its trade and current or in the economies of Germany’s years however, in spite of a very depreciation. Some countries the eurozone is likely to build adverse changes in economic account surpluses: trading partners). Then: strong trend of German currency may still need debt restructuring. a substantial trade surplus by conditions. A permanent surplus appreciation vis-a vis the USD, The scale and cost of this debt suppressing the value of the euro. is a sign of inflexibility, reflecting (a) Balancing imbalances among In (a), the excessive wage there were episodes of depreciation reduction would however be the inability of the economy to present eurozone members by increase vis-a-vis Germany’s as well. So, currency adjustments smaller, than if these countries GERMANY WILL AVOID utilize its labor resources in the a return to national currencies trading partner would be in both directions have played an stayed in the current eurozone A HARD LANDING situation of balanced foreign and enabling exchange rate automatically reversed important role in protecting the and if their economies suffered a trade. This state of affairs exposes adjustments within currency bands by the adjustment of the competitiveness of the German below-potential level of economic According to a widespread view, the country to great risk. A (which is advocated here), versus, exchange rate. economy. activity and high unemployment. the euro dismantlement and the sizable economy cannot rely on a

5. European Solidarity Manifesto, Brussels, January 24, 2013, http://www.european-solidarity.eu/. 6. Michael Pettis, The great rebalancing: trade, conflict, and the perilous road ahead for the world economy, Princeton University Press, Princeton and Oxford 2013.

56 57 A controlled dismantlement international trade (as was the currency is safer than bringing this of the eurozone would allow case in France in the 1930s). about through nominal wage growth Germany to solve the problem in Germany in the current shape of of a persistent trade surplus in a Secondly, the appreciation of the the eurozone. ■ gentler and safer way than other new German currency would be potential methods. The relative controlled by exchange rate bands mildness of this process would within a new European currency result from the combination of coordination system. two factors. The safety of this process stems from Firstly, the process would run in the fact that Germany would regain a the situation of economic growth flexible currency, which would help in Germany, due to economic the country to remain competitive growth in Europe caused by the regardless of future changes in segmentation of the eurozone. In relative costs and fluctuations in Stefan Kawalec is conditions of economic growth, the international situation. For the CEO of Capital Strategy, a strategy a decrease in export surplus will this reason - as explained above - consulting company. be much less painful than if it the reduction of the trade surplus He served as a former vice-minister of took place in a situation of global through the adjustment of the finance of Poland. recession and the collapse of exchange rate of the new German

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