The Euro in 2014: A Strength not a Weakness
In 2001 the well-known American economist Rudi Dornbusch summed up the attitudes of U.S. economists to the euro with the phrase “It can’t happen, it’s a bad idea, it won’t last”. For Dornbusch, as for many economists at that time, the euro represented a misplaced political project without the required economic rationale. The outbreak of the global financial crisis in 2008 at first seemed to corroborate Dornbusch’s negative assessment of the euro’s prospects. It has added to populist arguments that the euro is reducing the competitiveness of national economies and is somehow contributing to the difficult economic conditions facing member states.
However, these arguments fail to recognise the real achievements of the euro since its introduction into public circulation in 2002. In 2014 the euro remains an enlarging global currency with an important role across the financial markets. In the period since the outbreak of the financial crisis in 2008, the euro and European Monetary Union (EMU) have provided a framework for supporting struggling economies while putting in place an institutional framework designed to strengthen the economic co-ordination of member states. Political parties advocating a euro breakup remain in a minority across euro zone members.
Overall, populist rhetoric against the euro are fuelled by frustration at the slow pace of institutional reform within the European Union (EU) rather than entrenched public opposition to a common currency. The debate on the euro in 2014 needs to be moved from a static, ahistorical analysis of the weaknesses of EMU to a forward looking debate on banking and currency structures in a post-crisis environment.
The actions of the European Central Bank since 2011 have been vital in convincing the financial markets that the EU will act to establish an institutional architecture capable of strengthening EMU. Although significant achievements have already been made in this context, particularly with regard to budgetary and economic surveillance processes, much more work remains to be completed.
In the short term it is vital that the first two pillars of a robust banking union – a single European banking supervisor and a single mechanism for dealing with failing banks – are both brought into operation as dual supports to the euro. Any delays beyond the end of 2014 in implementing a mechanism for dealing with failing banks will increase market uncertainty, reduce private sector investment and act as further drag on employment growth. Internal EU disagreements as to the exact structure of a bank resolution mechanism should not be allowed to distract from the imperative of acting speedily to introduce such a mechanism.
The history of monetary unions, particularly in the United States, highlights that institutional reform (and policy innovation) is a required element of responding to a banking crisis. In this context it is up to the EU itself to meet the challenges of monetary and banking reform. If this is successfully progressed in 2014 Dornbusch’s negative assessment of the euro’s prospects will be long forgotten.