Niall Ferguson and David Marsh on the Uncertain Euro
Niall Ferguson and David Marsh have topical articles in Newsweek ("The End of the Euro") and the New York Times ("The Euro's Lost Promise"), respectively, that are both worth reading on the current uncertainty about the euro and what it might portend for the European Union.
They both agree on the factor responsible for the euro's instability. According to Ferguson, the European Monetary Union (EMU) had a fatal flaw from the outset:
[T]he worst defect in the design of the EMU . . . was that it was uniting Europe's currencies but leaving its fiscal policies completely uncoordinated. There were, to be sure, "convergence criteria," which specified that a country could join only if its deficit was less than 3 percent of gross domestic product and its public debt was less than 60 percent. But even when these were turned into a permanent set of fiscal rules in the Stability and Growth Pact, there was no obvious way they could be enforced.Why couldn't they be enforced? In referring to Europe's monetary union of December 1991 in Maastricht (southern Netherlands), Marsh explains:
[J]ust before the Maastricht meeting, Chancellor Kohl noted that a monetary union without a corresponding political union would be "a castle in the air." His remark echoed the concerns of the Bundesbank, his country's statutorily independent central bank, that unless it involved greater political and economic anti-inflationary discipline and solidarity among weaker and stronger states, a monetary union would be doomed.Why, then, did the European nations seek monetary union? Ferguson tells us one crucial reason:
Monetary union had geopolitical appeal . . . . In the wake of German reunification, the French worried that Europe was heading for a new kind of domination by its biggest member state. Getting the Germans to pool monetary sovereignty would increase the power of the other members over a potential Fourth Reich.Marsh again gives details:
In the vanguard of the effort [toward monetary union] was none other than Chancellor Helmut Kohl, the man who had driven German reunification with miraculous speed. He knew he had to enshrine the larger Germany in a new European order to ease its neighbors' fears. The euro would be the monetary equivalent of the ugly yet necessary military compact between NATO and the Warsaw Pact that supervised East and West Germany after World War II.The analogy between a recently reunified Germany bound monetarily to the EU and a recently defeated German divided between Nato and the Warsaw Pact sounds rather strained now, but I lived in Germany from 1989 to 1995 and can vividly recall the fears expressed by various other European nations in 1990 to 1991 about a unified, powerful Germany.
In other words, fear drove the Europeans' monetary union, much as fear drove European unification itself, fear of Germany. In short, the EU was based on fear, not trust, and suspicion continues to pervade the union, only now more generalized and not solely fixed upon Germany. But if the euro is to work, then the EU's central political power must grow and assert itself over fiscal policy. According to Marsh, this is one side-effect of the recent financial intervention, which poured nearly one trillion dollars into the effort to rescue Greece's economy, stabilize the euro, and ultimately save the European Union:
The huge amount of money aside, the significance of the rescue package was that, for the first time, power over the European Central Bank started to move to the politicians. President Nicolas Sarkozy of France, a longtime critic of the bank's sway, joined forces with another Frenchman, Dominique Strauss-Kahn, managing director of the International Monetary Fund, to impose political supremacy over the euro zone.The next year or two will determine whether the EU grows more unified through more centralized political power that can set fiscal policy . . . or not.
But if political centralization does succeed, there's still -- and even more so -- the so-called "democratic deficit" to deal with.