The discussion about the future of the Euro: Among a Post-Keynesian, a European Etatist, an Austrian economist and an advocate of a Northern Euro on the French website www.atlantico.fr.
The French paper is asking: “Sommet européen : créer un euro du Nord est-il le seul moyen de sauver l’Europe de l’austérité ?”
Is the creation of a Northern Euro the only way to save Europe from austerity?
The participants
Nicolas Goetzmann is a private wealth manager, a former portfolio manager. He is a graduate of the Master of Finance Bank Luxembourg School of Finance, and holds a Master in Business Law from Robert Schuman University of Strasbourg. In 2012, he created the site contrintuitif.com. He wants to stop austerity and to create a growth mandate for the ECB.
Paul Goldschmit is a member of the Advisory Board of the Thomas More Institute. Previously he was director of “Financial Operations” in the Directorate General “Economic and Financial Affairs” of the European Commission. His idea is to create a European federal state.
Philippe Herlin’s is financial researcher, lecturer at the CNAM. He is the author of Gold, an investment for the future (Eyrolles, 2012), Rethinking Economics (Eyrolles, 2012) and France, the bankruptcy? : After the loss of the AAA (Eyrolles 2012). His site is www.philippeherlin.com. He advocates the introduction of local currencies, in parallel to the euro.
George Dorgan is a former analyst at UBS and Reuters. He currently works as financial consultant in Switzerland. He is also the chief editor of the blog snbchf.com . George Dorgan‘s idea is to eliminate the global imbalances in merchandise trade, the big German surplus, but also the trade deficits of the periphery, the United States, the UK and France. Europe should be divided into two different zones, one with a stronger Northern euro and one with the existing, the old euro. This would make the periphery competitive very quickly instead of sinking into years and decades of austerity and depression.
The discussion
European leaders meet in Brussels on 13 and 14 December. Four years after the start of the financial and economic crisis, the EU is now facing a fiscal crisis. Unless the real causes of the crisis are monetary …
Atlantico: EU leaders meet on December 13 and 14, while the eurozone is still in crisis. Austerity policies seem so far to be ineffective or counter-productive and developing countries continue to sink into recession. Finally where did it wrong how to diagnose the cause? The current crisis in the eurozone, is it fiscal or monetary?
Nicolas Goetzmann: This is the problem. We have a crisis of aggregate demand, and demand is under the responsibility of the monetary authority, the governments can do nothing here. Well, it will change the diagnosis to address the cause of the crisis, rather than what the symptom of the crisis, which is debt. The problem is that we have monetary doctrine, this is one topic that should be at the heart of the debate.
The difficulty is that any revision of our monetary doctrine requires an overhaul of the Maastricht Treaty, and that requires a significant political force. Many central banks (Japan, United Kingdom and United States) are drawing the same conclusion and are ready to change the way they act. This external pressure should be able to speed things up.
Philippe Herlin: This is a monetary crisis first: the euro is not suitable for all European countries. It is time that the European authorities realize it! Fiscal adjustment is not sufficient on its own.
Paul Goldschmidt: Monetary policy is not the main problem. Without a federal structure and transfers to show solidarity, it is clear that the monetary policy is not adapted to such a situation. A currency without a state cannot function in the long run. It happens very quickly after opportunities. In the book of Daniel Cohn-Bendit and Guy Verhofstadt Standing Europe! this sentence is extremely powerful: it is possible to build a state without money, but we cannot build a currency without a state.
George Dorgan: In fact, there has never been a “euro crisis” in the sense of a crisis in all countries of the region. The euro crisis has always been a crisis in the periphery countries, too weak to have the same currency as Germany.
For the first time, it seems that Germany is also strongly affected. I do not think it will last. Germany and other northern countries currently benefit from a weak EUR/USD that increased their trade surplus with the U.S., Asia and France. The Americans do not create enough jobs as the uncertainty is too high, but also because the dollar is too strong against the euro.
The weak European countries are in a vicious circle: more austerity, less growth, wages must fall as directed by the European Commission to increase competitiveness. As it is not so easy, people are laid off. There is no foreign capital to finance innovation. Result: less growth and more austerity to satisfy the “Fiscal Compact” … and therefore more unemployment.
At the end, we eventually they manage to reduce debt. But the ratio GDP to debt increases, because GDP decreases. A few years later, the leaders will realize that the process to improve competitiveness will last fifteen or twenty years … until the labor costs falls:
Spain has currently 32 € as hourly labour costs, the Slovak republic 12€. Given that labour costs must fall in the periphery, they will do so until they arrive at 25€ per hour in 15-20 years; while, for the Slovaks, for the same period, they will go up from 12 to 25€. It is clear that foreign investors will prefer to invest in the Slovak republic and not in Spain. Already in 2005 big parts of the Spanish car industry went to the the Slovak republic.
Italy has a lot of rich people, that are hiding their money, but they might invest in Italy. Spain and Portugal do not have sufficient local capital, they must borrow the money. Both countries will end up like Greece, it just takes some more years.
During these 20 years, the uncertainty will slow the progress even in Germany while requiring significant transfers from Germany to support the South.
What risks would the most fragile countries in the euro area run when they are asked to leave? Why is this a scenario that the EU refuses to consider?
Nicolas Goetzmann: Any loss permanently weakens the whole entity. Europe is an entity that has more credibility than the sum of its parts. The EU refuses to consider this because it would be just as much a victim. In such a case, there will be no winner. If a country leaves, then it will default and proceed immediately to a devaluation, as would any state in such a situation. The Union will lose its reason to exist, because a union is assumed to be united.
The credibility of the area is its cohesion. For the moment it is real, but it suffers from an inability to resolve the money issue. There is insufficient aggregate demand in Europe and the only authority capable of responding to this problem is the ECB.
Philippe Herlin: The loss of Greece and other struggling countries in the euro area faces two problems. The first is political: it would be an admission of failure of the European construction.
The second is: Target 2. German has trade surpluses with the other European countries, but this surplus is translated into liabilities of Greece, Italy, Spain towards the Bundesbank. If Greece leaves the euro zone, the liability disappears (or is paid in drachmas), and therefore Germany has much to lose, such a scenario would cause a cataclysm in its public accounts!
Note: This story is related to TARGET 2 is a construction of the euro which is in fact not a true single currency, if there were just one central bank, then there wouldn’t be these problems with compensation among the national central banks (similar at the time of the French franc there were regional central banks with a compensation system between them!). Look at a bank note and before the serial number, there is a letter, certainly U: is a “French” note, it appears on the balance sheet of the Bank of France. So the Banque de France thus has an accounting position vis-à-vis its peers. Target 2 is the mirror image of the balance of payments: it makes the system intractable and with pronounced imbalances. It is a crazy system.
Paul Goldschmidt: The challenges of the euro area remain the same with 7 or 17 members. If there were only a few countries from the North that kept the euro, they would be subject to the same pressure to create a federal state structure in the euro zone just as now with 17. That is why so much effort has been made to ensure that Greece remains in the eurozone.
George Dorgan: European leaders are afraid of the famous “bank run.” If we let Greece go, people will withdraw their money from banks in peripheral Europe and place it in a German bank. A catastrophic scenario for leaders and their best friends, the banks.
Under these conditions, do you think the scenario of a two-speed EMU will be more acceptable and feasible? Northern countries could somehow make a break? Should they consider abandoning the single currency to save the common currency?
Nicolas Goetzmann: This idea does not suit me. If there is secession how long will we wait for a second, then a third, to arrive at the starting point again?
The single currency can be saved if we want to. This implies a transfer of sovereignty to a new budgetary power. The monetary authority must be changed. The longer we wait, the less the peoples of Europe will have confidence in this scheme. If the policy offered growth and full employment, it might be more likely to build support. On this issue, the economy is only secondary in my opinion: this is a highly political issue. Are the peoples in Europe prepared to become European people? The rest is incidental, economic solutions exist.
Philippe Herlin: I do not believe in a two-speed eurozone, with a strong Northern Euro and a weak Southern Euro, because the weak euro would absolutely not be viable. We are now prisoners of two alternatives: either the troubled countries remain in the euro area, where they must always obtain more aid, without any hope of recovery. Alternatively they leave the euro,it is a very dangerous risk to take.
I propose a solution to this dilemma: change (for countries in difficulty) the euro from a single currency to be a common currency. Allow Greece to reintroduce the drachma, but leave the euro as complementary currency, and each economic actor chooses the proportion of two currencies to be used. Many countries operate the dollar in addition to their own currency: it is the same idea, a freedom that gives resilience and adaptability in the monetary system.
With regard to France, I am not advocating this scenario because our economic problems come from excessive public spending, we need structural reforms . That said, as the euro becomes increasingly weak (due to the monetization of the ECB and multiple rescue plans), France should probably think about it.
Paul Goldschmidt: The answer to the idea of solving the crisis, imagining that the euro area is divided into two zones is: No, No! This would mean creating two states: one with “euro one” and another with “euro two”. When even today we are not able to create a state for the eurozone as a whole. It will not be easier to create two states that are opposed by definition, they are different. This idea of wanting to solve the problem of the crisis with two eurozones is doomed to failure from the start.
In the scenario where the eurozone would prove to be unable to be sustained in its present form with its 17 members, and the eurozone implodes, it is quite conceivable that a part of the eurozone would build a monetary union. The other part would fall back to their proper currencies. However, it is entirely possible that the eurozone is divided into two: the euro may survive on a smaller scale, possibly with more northern countries, but the “southern” will not create a euro area. It will disintegrate in monetary terms, in autonomous countries. Shocks that would follow a collapse of the eurozone, would make it very, very difficult to create a “northern euro zone” with so-called stronger countries. The need to create a state for the currency would be the same as today. As previously stated, we return to the words of Cohn-Bendit and Verhofstadt.
In theory, it is quite conceivable that after the catastrophe would be the implosion of the euro area (it certainly implies the collapse of the entire European Union) with a union reborn from the ashes. It would be more restricted, and correct the mistakes of the past. We would also adopt institutional structures like a state-like structure for the common currency.
George Dorgan: The two-speed Europe is already a reality: just compare the rise of the stock market or real estate prices in Germany compared to the falling Spanish stocks and home prices. It is necessary that European policymakers admit and recognize that the euro, as currently designed, was a mistake.
Accepting this two-speed Europe, it is simply accepting that Germany and other Northern countries have their own currency, a “northern euro”, which would be 20% more expensive than the euro countries in the south, the euro today. This operation is achievable overnight, avoiding the risk of catastrophic expulsion of a weak country. During a first short period only credit card payments will be possible, then some newly printed Northern euros would replace the (Southern) euros in the Northern countries. The purchase of (Southern) euros under the supervision of a Northern European Central Bank would reassure markets and maintain the 1.20 exchange rate between the two currencies. There will be cross-border capital controls for a short period, a (previously forbidden) method the IMF is already talking about again.
What are the advantages and disadvantages of such a scenario?
Nicolas Goetzmann: Northern countries would be left with an ultra strong currency but lose market share globally. Southern states will go the other way. Maybe we will realize that the south is no less “good” than the north. But this is not a reason to break 50 years of European construction. The idea of creating two blocks on the engines of the humiliation and bitterness does not seem to be an exciting project. What may make economic sense here is meaningless policy.
Philippe Herlin: The advantage is to give freedom to economic actors, and thus the flexibility of the system. It does not even stop there, we must also be able to create local currencies, or circulate as gold or silver coins. This is the idea of complementary currencies or free, defended by economists such as Friedrich Hayek and Silvio Gesell. The downside? The state loses its monetary power of control over people’s lives … But I think it’s great.
Paul Goldschmidt: There are no advantages or disadvantages, it is not feasible! Everyone can agree that we can look back and say that the creation of the euro was an enormous advance. But it must be put in the context that it was a step in the deepening of monetary union since it was called “economic and monetary union.” It was the challenge of making monetary union first, and forgot the economic union! When the crisis came, we realized that we had created a monster. It is not by creating two monsters instead of one that we will make a move one way or the other.
George Dorgan: The downside is that the upper classes and the banks of the North and the Bundesbank will realize some losses with their holdings in “Southern euros”, but a lot less than during the twenty or maybe endless transfers from Germany to the periphery. German industry and exporters will complain about the strong Northern Euro. But currently, the Germans are the world’s worst currency manipulators, more than China or Switzerland!
But history shows that the Germans were always been able to do new innovations, even with the ever rising German mark.
If not, what other solutions has the EU to break the deadlock?
Goetzmann Nicolas: It’s a race against the clock: tight monetary policy has proven to be ineffective in Japan for 22 years. I do not think the Greeks and Spaniards will accept 20 years of stagnation, they will revolt, as will the French.
A revision of the statutes of the ECB towards a policy of growth to give greater power to political leaders. This new life as a basis for harmonization of budget, tax etc … In addition, it is important to understand that the budgetary power is now neutralized by the monetary authority. The system of price stability has the effect of giving all powers to the ECB on the activity level. Changing this scheme will restore power to the politicians.
Philippe Herlin: I do not see any other, and certainly not make more bureaucratic construction, even more debt, etc …
Paul Goldschmidt: There is a growing consensus for the broader fact that the only way out of the crisis in the euro area is the creation of a federal state. It is widely shared. However, some observers argue that the state will not be political. Europeans are not willing to share a common sovereignty.
At the same time, many people realize that the euro will not survive if we do not go further in the political, economic and social realms. The crisis has deepened inequalities between countries and even within them. These inequalities reinforce human tendencies which are rather less worthy, such as selfishness .Taking into account the latter, few realistic people would bet on an economic union, even if we know that it is the only way to save the euro.
The ECB has done an absolutely remarkable job, pushed to its extreme limits, without violating its status, although in the spirit it was beyond (otherwise the end of the euro will have already occurred). In the United States, there is the Fed is the central bank. It must give responses to the American Congress that is democratically elected, and has very extensive powers of control within the American federation. In Europe, the European Parliament does not have the same powers. On should reflect about an institutional structure to put in front of the ECB, which could play a similar role to that of the United States Congress.
George Dorgan: A Union transfer or eurobonds are no solutions. As I said, the cost would be even higher in Germany than a two-speed Europe with two separate currencies, 20 years and more of financing the periphery.
