Editor’s Note: Paul Hockenos is the author of “Berlin Calling: A Story of Anarchy, Music, the Wall and the Birth of the New Berlin.” The opinions in this article are those of the author.
Amid the dramatic turbulence in international markets, triggered above all else by Trump’s trade war with China, the eurozone economy looks like one of the few solid cornerstones of the global financial system.
Despite an unsolved debt crisis in Italy, the world’s second most powerful currency, behind the dollar, appears robust and ready to go after nearly a decade of crisis management and reforms.
But that calm and outward vitality could well be illusory, as was the long period of stability between the euro’s introduction – first as common accounting currency in 1999 and then in note and coin form in 2002 – and the onset of the European debt crisis in late 2009.
Ultimately, the monetary union still bears many of the fundamental structural flaws that it was born with, which could well undermine the currency again, should crisis hit as unexpectedly as it did ten years ago.
Italy, Greece, and Portugal, among others, remain highly vulnerable to external shocks and speculation in their bond markets. The eurozone is dangerously divided between winners and losers with little in hand to rectify the imbalances anytime soon.
“It can’t be that 19 countries have the same currency but have 19 different government bonds and vastly different labor markets with large wage differentials,” says Ulrike Herrmann, a German economic journalist and author of a book on the eurocrisis.
This, she says, leaves the door wide open for investors to speculate on the currency markets at no risk, which exactly what happened between 2011 and 2012. “The ECB has to function like a real central bank for the eurozone that can intervene in the bond markets when it’s called for.”
In a single, federally structured country with a number of states whose economies fare differently from year to year – some better, some worse – federal institutions balance out the inequalities.
In this process, central governments help lower-income states through transfers and safety-net programs. The central authority doesn’t have to be a state to make it work, but there must be an institution endowed with the relevant powers. In the case of the EU, it would be an adequately equipped European Central Bank (ECB).
The crisis that waylaid the eurozone, commencing a recession that would last much of the next decade, came about as a result of the eurozone not having such mechanisms. The economies of southern Europe couldn’t, and still can’t, compete with powerhouses in the north in export markets.
Nor can they today adjust their interest rates and currency values as they had in the past with their own national currencies, which made exports cheaper and debt manageable.
In the 2000s, they borrowed and borrowed to cover their losses. When the scale of debt came to light – along with their inability to pay it off – the bond markets turned against them, driving up their indebtedness even further and pushing them to the brink of insolvency.
Much has been done to right these imbalances and tie the euro’s economies together in order to prevent and correct them in the future. The role and powers of the ECB are now greater, giving it leeway for more proactive engagement. Through a bailout fund, it has shelled out over €2.5 trillion for bond-buying that aided several of the zone’s struggling countries.
But the northern Europeans want the ECB to pull in the reins, which indeed it is doing. The north-dictated, neo-liberal rationale of tight-money policies, low-inflation, and austerity yokes for troubled economies remains the program of the day, despite the mediocre results until now.
More than any other eurozone nation, Germany has resisted the tighter linking of the zone’s banking systems. And the guarantee of transfers – in the form of euro bonds, for example – for struggling countries is still a no-go.
“The eurozone also needs coordinated wage policies,” says Herrmann, “so that countries like Germany, where wages have remained much too low, doesn’t have such an advantage over, for example, France where wages are higher.”
French President Emmanuel Macron’s proposals for common spending tools to create more convergence in the currency union has gone virtually nowhere. During his 2017 campaign, he argued for the substantial transfer of resources and economic power from the national to the eurozone level.
A small victory for the French President (and the eurozone as a whole) is the creation of a common eurozone budget, which was agreed to by the northern Europeans, although grudgingly. Yet it will probably be so modest in size – just a fraction of the hundreds of billions of euros Macron had envisioned – that its clout will be severely proscribed from the onset.
And there’s still no consensus on how the budget will be used. Again, fiscal conservatives have ruled out what common economic sense calls for, namely an unemployment insurance scheme or a deposit insurance mechanism, the latter which would instill confidence in deposits across Europe and prevent bank runs.
The persistent naysayers to greater integration tend to be German conservatives and the Netherlands, backed by several other northern European countries. They say they won’t pay in more that will, one way or another, compensate for “missteps” of others.
All of this means that the next debt crisis, or another calamity, would strand the lower-income countries, mostly in southern Europe.
The EU and the euro can’t be turned into a game in which Germany and its norther neighbors always win because they make the rules. Europe’s export-strong north profits disproportionately from the euro, and the south suffers from it. This is built into the system.
Germany high-handedly demands austerity measures for Italy and others for the reason that they violate current account debt limits while German itself has exceeded the upper caps for surpluses for years now.
It’s no wonder that national populists rule the roost in countries like Italy. One way to battle them back would be to finally provide the eurozone with the medicine it needs – a treatment that would, ultimately, benefit everybody.