The Euro and the Damage Done? Not Quite

♠ Posted by Emmanuel in ,, at 9/17/2010 08:34:00 PM
In case you haven't seen it yet, do catch ECB central board member Lorenzo Bini Smaghi discussing why the eurozone isn't exactly on the brink of collapse in Foreign Affairs. Unlike certain other folks, those at the ECB know they have a stewardship role in maintaining confidence in their money. While various commentators feared the worst for the euro during the height of the Greek crisis, look at where it is now--above the psychologically important $1.30 handle. And if the yen is also giving it to the dollar, threatening to dive below 83 yen to the greenback and prompting Japanese intervention for the first time since 2004, I guess we know which unit of account is the 97 pound weakling in the currency world.

Still, there are certainly things that can be done to prevent a rehash of the Greek episode. While kicking out repeat offenders of the Stability and Growth Pact (SGP) isn't likely, there needs to be better monitoring and sanctioning to make fiscal indiscipline more punishable in a way that deters habitual violation:
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.

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.
Just as two world wars taught Europe that another massive conflict started on their continent made no sense for humanity, they are busy ensuring that another Greece won't sully their integration project. I still believe in it, unlike many a Eurosceptic.