Just as the economic crisis exposed problems in the Greek economy, it also exposed weaknesses in the euro’s institutional framework. Restoring confidence will require strengthening that framework. A task force headed by EU President Herman Van Rompuy is scheduled to offer concrete proposals to do so by the end of this year. And in June, the ECB released its own recommendations: stronger independent surveillance of the budgetary policies of the member states with more automatic implementation of sanctions; improved surveillance of country competitiveness to ensure that member states continue to converge economically; and a crisis management structure with strong conditionality to support countries that implement adjustment programs. We acknowledge that it will not be possible to expel member states that fail to comply with EU budgetary guidelines, so such a threat would ultimately not be credible.I guess folks who've been at the epicentre of two devastating, globe-spanning conflicts know that keeping it together makes more sense than the alternative--and that goes whether you're talking about security or currency matters.
The EC and the European Parliament have also called for the creation of three financial supervisory authorities (the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority) and a regulatory authority (the European Systemic Risk Board). Because the economies of the eurozone are so interconnected, eurozone-wide supervisory and regulatory authorities are necessary. They would have the discretion to press national governments to remedy problems and would be independent enough to act preemptively, without having to wait for a crisis to galvanize politicians to action. Some may dislike the idea of giving international bodies the power to constrain national economic policy. But financial contagion spreads too quickly, and European taxpayers have had to pay for the failures of other countries too often, for the current system to remain.
Forecasting the euro’s demise was premature. The EU and eurozone countries were able to respond to the financial crisis with appropriate corrective measures: many countries adopted strong fiscal adjustment packages; eurozone countries have announced, and in some cases already implemented, unprecedented structural reforms, not least of which was their joint decision to coordinate and publish the results of their bank stress tests; the new European Financial Stability Fund has been established and can be used to support other eurozone countries in distress, and a task force on reform will offer and approve concrete proposals to strengthen eurozone governance by the end of the year.
One might criticize these measures for having been taken only after a crisis was eminent, but this is ultimately how democracies work in the face of difficulties. Problems in the economies of eurozone countries and in the framework of the monetary union will need to be addressed, but all the constituent countries will emerge stronger if they continue to pursue the right adjustment policies. Europe will need to find the right mix of cooperation, in defending its common interests at the global level, and competition in incentivizing growth. It will need to rely both on the center, which must ensure strong fiscal policy, and on the member states, which control much of the rest of economic policy. But one should take inspiration from the EU’s history. Finding these balances has historically been one of Europe’s key strengths.
In case you haven't caught it yet, do read ECB Executive Board Member Lorenzo Benito Smaghi's piece in Foreign Affairs on why the euro is not only surviving but thriving amidst all the fearmongering about the imminent demise of the Eurozone and other similar folk tales. With the euro well past the $1.30 handle and the yen needing intervention against the dollar to prevent the greenback from falling below 83 yen to the dollar, I guess we all know which currency was, is, and will be on the back foot. Here is the concluding section where Smaghi not only charts the changes that should help ensure no more Greek fiascos, but also offers a prediction of continued success for the single currency: