So what should be done about a currency without a state to back it?
By Yanis Varoufakis
Europe is at the mercy of a common currency that not only was unnecessary for European integration, but that is actually undermining the European Union itself.
So what should be done about a currency without a state to back it – or about the 19 European states without a currency that they control?
The logical answer is either to dismantle the euro or to provide it with the federal state it needs. The problem is that the first solution would be hugely costly, while the second is not feasible in a political climate favoring the re-nationalization of sovereignty.
Those who agree that the cost of dismantling the euro is too high to contemplate are being forced into a species of wishful thinking that is now very much in vogue, especially after the election of Emmanuel Macron to the French presidency. Their idea is that, somehow, by some unspecified means, Europe will find a way to move toward federation. “Just hang in there,” seems to be their motto.
Macron’s idea is to move beyond idle optimism by gaining German consent to turn the eurozone into a state-like entity – a federation-lite. In exchange for making French labor markets more Germanic, as well as reining in France’s budget deficit, Germany is being asked to agree in principle to a common budget, a common finance ministry, and a eurozone parliament to provide democratic legitimacy.
To make this proposal palatable to Germany’s government, the suggested common budget is tiny (around 1% of aggregate eurozone income) and will fund only the basic structures that a federation-lite entails, like common deposit insurance to give substance to Europe’s (so-called) banking union and a portion of unemployment benefits. The plan also envisages common bonds, or Eurobonds, which will cover but a fraction of new debt and explicitly prohibit mutualization of member states’ mountainous legacy debt.
Macron knows that such a federation would be macroeconomically insignificant, given the depth of the debt, banking, investment, and poverty crisis unfolding across the eurozone. But, in the spirit of the EU’s traditional gradualism, he thinks that such a move would be politically momentous and a decisive step toward a meaningful federation.
“Once the Germans accept the principle, the economics will force them to accept the necessary magnitudes,” is how a French official put it to me recently. Such optimism may seem justified in light of proposals along those lines made in the past by none other than Wolfgang Schäuble, Germany’s finance minister. But there are two powerful reasons to be skeptical.
First, Chancellor Angela Merkel and Schäuble were not born yesterday. If Macron’s people imagine a federation-lite as an entering wedge for full-blown political integration, so will Merkel, Schäuble, and the reinvigorated Free Democrats (who will most likely join a coalition government with Merkel’s Christian Democrats after the September federal election). And they will politely but firmly reject the French overtures.
Second, in the unlikely event that Germany gives federation-lite the go-ahead, any change to the functioning of the eurozone would, undoubtedly, devour large portions of the reformers’ political capital. If it does not produce economic and social results that improve, rather than annul, the chances of a proper federation, as I suspect it will not, a political backlash could ensue, ending any prospect of a more substantial federation in the future. In that case, the euro’s dismantling will become inevitable, will cost more, and will leave Europe in even greater shambles.
If I am right that Macron’s gradualism and his federation-lite will prove to be a failure foretold, what is the alternative? My answer is straightforward: Re-deploy existing European institutions to simulate a functioning federation in the four realms where the euro crisis is evolving: public debt, banking, investment, and social deprivation.
Once these four sub-crises have been stabilized, hope will be restored, and the idea of Europe rehabilitated. Then – and only then – should we embark on the constitutional assembly process underpinning any agenda for constructing a full-fledged democratic federation.
But how can we simulate a macroeconomically – and macro-sociologically – significant federation now, under the existing treaties and institutions?
Imagine a press conference featuring the presidents of the European Council, the European Commission, the European Central Bank (ECB), and the European Investment Bank (EIB). They issue a joint declaration launching – as of tomorrow morning – four new initiatives requiring no treaty change or new institution.
First, the EIB will embark on a large-scale green investment-led recovery program to the tune of 5% of eurozone income, funded entirely through issues of EIB bonds, which the ECB will purchase in secondary markets, if necessary, to keep their yields ultra-low.
Second, the ECB will service (without buying) the Maastricht-compliant part (60% of GDP) of maturing eurozone sovereign bonds, by issuing its own ECB bonds. These bonds are to be redeemed by the member state whose debt has been partly serviced by the ECB at the very low yields that the ECB can secure.
Third, failing banks will be de-nationalized. Based on an informal intergovernmental agreement, the ECB’s banking supervisor will appoint a new board of directors, and any recapitalization will be funded directly by the European Stability Mechanism. In exchange, the ESM will keep banks’ shares, in order to sell them back to the private sector at some future date.
Fourth, all profits from the ECB’s bond purchases, along with any profits from its internal Target2 accounting system, will fund a eurozone-wide, US-style food-stamp program that provides for the basic nutritional needs of European families falling below some poverty threshold.
Notice how one press conference suffices to announce to the world that the eurozone is about to simulate a political federation that uses existing institutions to restructure all public debt (without any haircuts), create a proper banking union, boost aggregate investment, and alleviate poverty on a continental scale. Notice also that this simulated federation can indeed be brought about tomorrow morning, without falling afoul of the existing EU treaties.
The euro crisis resulted from the fallacy that a monetary union would evolve into a political union. Today, a new gradualist fallacy threatens Europe: the belief that a federation-lite will evolve into a viable democratic federation. As paradoxical as it may sound, announcing a simulated federation today may be the last chance to rescue the dream of a proper European Union.
Yanis Varoufakis, a former finance minister of Greece, is Professor of Economics at the University of Athens.
Copyright: Project Syndicate, 2017.