This extraordinary summit of European heads of state in Brussels will go down in history for having overhauled the European monetary union. The euro will never again be the currency it was before.
This is a golden opportunity. The EU states have agreed in principle to provide financial aid to Greece if need be – even though money has yet to change hands: the Greeks have to wait till April to tap the capital markets first. What this means for the financial markets is that the Community won’t leave a deeply overindebted member to its own devices, but stand by the country if necessary to avert a national bankruptcy. Whether that will involve loans, guarantees or the purchase of government bonds remains to be seen – but that is merely a logistical matter.
Circumventing the ‘No-Bailout’ Clause
The point is that one of the foundations of the monetary union was pried loose today in Brussels: the rule that member countries are not allowed to help one another out. It was Germany, incidentally, that insisted on enshrining that principle in the European treaties to ensure budgetary self-discipline. It no longer applies now that every member country knows it can count on the others in an emergency. In other words, Europe agreed on a de facto breach of its own treaty. And it was a conservative German chancellor, of all people, who urged the move, which may pose legal problems, but was economically overdue.
After all, the non-intervention rule failed to prevent certain excesses – such as Greece’s spiralling debts and Germany’s over-dependence on exports. That is partly due to the system’s built-in reliance on financial markets as a corrective force. In the past, however, the markets did not penalise deeply indebted states with higher interest rates so as to force them to consolidate their budgets, but willingly lent them more money, which in turn gave rise to one wave of speculation after another. Now, though, as a result of the financial crisis, the interest rates charged on loans to the Greek government have been soaring. So speculators had trained their sights on the euro.
German pledges solidarity but not on any terms
Basically, the EU leaders made up their minds to replace the market mechanism with a state-run mechanism: the EU helps out countries in distress and, in return, obtains oversight over their economic policies. It has to penalise the Greeks if they don’t put their budget back on an even keel, just as it has to penalise the Germans if they snatch market shares from their neighbours through wage dumping. There was no alternative: if Greece were to go down, it would take other teetering EU states down with it. German banks holding billions in Greek and other government bonds would have collapsed in its wake, German exporters would have lost markets. Saving Greece is not only an act of solidarity, it’s in Germany’s best interest.
The EU’s decision has tremendous political ramifications. The monetary union will only work in future if every participating country gives up a chunk of its sovereignty. The Greek government will have to put the Brussels austerity regimen across, taxpayers in Germany and other countries will have to foot the rescue bill. That will either blow Europe apart – or solder it together into a real political union. The euro has always been a rickety construct, a currency without a state. If all goes well, it will now be fitted out with the requisite political underpinnings. That will harden, not soften, the common currency.
POINT OF VIEW
The urgent need for a European Monetary Fund
Greece, Spain and Portugal are now facing increasingly adverse conditions in financial markets, and the debilitating effect of increasing risk premia, which limit their ability to service sovereign debt. If these countries were not part of the eurozone, the current juncture would be largely predictable: either they would print more money, and in so doing run the risk of boosting inflation and reducing their wealth in the long term, or they would call on the International Monetary Fund (IMF) for assistance. This would take the form of a line of credit from the IMF to their central banks which would guarantee their capacity to pay back loans and thus reassure their creditors. But these conditions do not apply in the eurozone. The states in question do not have their own currencies, nor do they set exchange rates. Furthermore, in the eurozone, default by a single state would not occur in isolation, but would affect other countries in the EU and the value of the Europe’s currency.
When you consider that Europe is the main stakeholder in the IMF, and the euro is the world’s second-ranked reserve currency, the situation is clearly absurd. Why not constitute a European Monetary Fund (EMF)? In spite of the fact that they do not have a common currency, the Asians have now planned to establish their own Asian Monetary Fund, and Europe should follow their example. The goal is to create an adequate financial mechanism that will allow troubled countries to borrow at normal interest rates. This could be funded in several ways: via shared sovereign borrowing on behalf of all of the eurozone states, via the Commission which would borrow to create an emergency stabilisation fund, or an exceptional lending facility at the European Central Bank (ECB). The European Monetary Fund has now become an urgent necessity, but it is not the only measure that Europe needs to implement. It should also be accompanied by reinforced governance in Europe’s member states, which in turn highlights the need to move forward with economic integration in the eurozone. Stéphane Cossé, Le Monde (excerpts)