The implementation of a monetary union in Europe, to take full advantage of the Single Market's potential benefits, has not hitherto delivered the expected results. On the contrary, the euro area has been afflicted by many troubles, including anemic growth, unemployment, and inequality. Many blame the euro's defective design, and especially its incapacity to promote economic convergence and provide adjustment and stabilization mechanisms. Others blame fiscal indiscipline by some of its members. The latter view prevailed when shaping the austerity policies imposed on the countries more affected by the financial and sovereign debt crises, intensifying an economic recession with dramatic social consequences. As a result, citizens' distrust in the European Union's institutions grew, along with support for nationalistic political forces opposing the European integration project. This chapter assesses one of the main deficiencies of the euro's governance model – lack of automatic stabilization – and discusses proposals to overcome it.
TopIntroduction
The creation of an economic and monetary union (EMU) in Europe was a notable achievement. Never before did such a large group of countries voluntarily surrender autonomy over domestic monetary and foreign exchange policies, while maintaining, de jure if not absolutely de facto, fiscal and political independence. In fact, the introduction of the euro twenty years ago, after decades of advances and setbacks, and much debate over its most adequate institutional framework and probable advantages and costs, marked the beginning of a rare real life experiment – one where a group of diverse economies adopt a common currency without having created mechanisms to promote real convergence, and to provide stabilization in the aftermath of shocks.
So far, the experiment has not lived up to expectations. If the euro is assessed taking into account its broader historical context, the outcomes up to now are, in many facets, almost the exact opposite of what they should have been. For the single currency was not an end on itself, but a phase in a process initiated after the Second World War primarily to end a long time series of military confrontations in Europe. The project of economic integration initiated in 1957 was conceived as a pact for peace, a first step for the creation of a community of prosper and solidary citizens. The Treaty of Rome reflects these ambitions. In its preamble, the signatories proclaim their determination to attain economic and social progress, balanced trade and fair competition, to eliminate the barriers dividing Europe, to improve living and working conditions, to promote harmonious economic development by reducing existing regional differences and the backwardness of the less favored areas.
Thirty five years later, when agreement was reached over the conditions for adopting a common currency, the Treaty on European Union (EU) – often referred to as Maastricht Treaty – confirmed the compromise to promote “a harmonious and balanced development of economic activities, sustainable and non-inflationary growth respecting the environment, a high degree of convergence of economic performance, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States”(Title II, p. 11).
However, EMU’s design ended out somewhat misaligned with such objectives. The convergence criteria to allow membership comprised a set of nominal (rather than real) macroeconomic indicators, the union’s monetary policy was solely assigned to price stability, and no common risk sharing and stabilization institutions were created. In the subsequent years, real convergence did not occur and financial markets’ euphoria triggered a credit boom that contributed to intensify current account disequilibria amongst member states. By the time the 2007 financial crisis hit, the consequences of EMU’s deficient architecture became painfully visible. The shock impacted the euro area differently and no stabilization device was available to help the more affected peripheral members. A sovereign debt crisis and economic recession ensued.
The first reactions to such dire state of affairs were also not in line with the treaties’ principles. The countries more in need of help were held responsible for problems they mostly did not create, and could not have avoided, and forced to endure the whole weight of the measures taken to resolve them. Financial funds were provided but at high interest rates and under the obligation of applying a pro cyclical austerity program which comprised many ill-timed and counterproductive reforms. The conditions were so harsh and so at odds with promoting repayment that it has been questioned whether the intention was to help or to punish. The result was a prolonged recession, very high unemployment, especially amongst youngsters, and increased inequality between and within euro members. Instead of prosperity and cohesion, the euro had produced the opposite. As a result, the divide between countries grew up, confidence in EU’s institutions is fading and political extremism is on the rise.