One Currency, Two Europes

The following sections are included:

• Contents
• Acronyms
• Preface and Acknowledgments
• Introduction: Prolegomena to the International Crisis

The post-war decades were a period of great economic success, particularly in Western countries. Western economies never experienced such sustained growth rates for such a long period of time in their history. This success benefited most citizens and social groups and classes, particularly in the first half of the period. Economic flexibility and social mobility increased in all countries. As a consequence, societies and democratic polities appeared fundamentally strong and stable. There were periods of economic and financial difficulties; however, these never reached systemic levels. The overall performance was such that there was growing confidence in the ability of governments and international organisations to manage instability in ways that kept damages and risks at a controllable level.

The international crisis started in the United States in 2007–2008. It is in that country that the first clear signs of financial distress and the risk coming from unsustainable financial and real bubbles were concentrated. The three decades preceding the crisis were a period of considerable financial innovation and restructuring of industry. The latter took often place through mergers and acquisitions (M&A), often led by financial and fiscal considerations. The US economy became a huge and dynamic financial machine that led to innovation, economic growth and the accumulation of financial and real bubbles.

The international crisis hit the Eurozone hard. Remarkably distinct patterns among the member countries played an important role in the resilience to the crisis. The Eurozone, and hence the euro, revealed to be highly vulnerable to external shocks, suffering of deep-seated as well as new structural and financial imbalances. At the same time, the Eurozone's ability to cope with its economic vulnerability was weak, revealing rigid and lengthy decision-making procedures and a fundamental lack of trust among governments. Coordinated policy responses were slow. However, the crisis gave an important push to the coordination of economic policies and related instruments. Such coordination was both an important part of the problem and, hopefully, an important component of the solution.

The Eurozone lost relative economic strength compared to the United States and other countries approximately since the mid-1990s. However, this statement is insufficient to give a correct picture of the Eurozone. The Eurozone is an economic and monetary union, albeit an incomplete one, and not a unified country. In fact, the union lacks a common government capable of transferring resources among its various components. The Eurozone also lacks a true lender of last resort, although a recent interpretation of its mandate under the pressure of worrying economic and financial events transformed the European Central Bank (ECB) into an indirect lender of last resort.

To work properly, the Eurozone buildup and functioning should comply with a number of requirements. Among the most important are the following. First, European integration and globalisation should be compatible in order to assure the smooth working of markets. While regional economic integration is known for creating trade within the integrated area and diverting trade from outside the area to its inside, in an open and integrated world economy this process should advantage the member countries of the area without reducing its trade with the rest of the world. This aim was largely implemented and also trade of the European Union (EU) with the rest of the world increased.

The previous chapters assessed the external economic context of the Eurozone and its internal consistency in the years before the crisis. The overall conclusion was that the Eurozone economic performance and competitiveness were decreasing. Moreover, the process of catching-up to the United States had slowed down, lost momentum and gone in reverse. Yet the situation was far from being hopeless. Some of the main reasons for the diminished relative performance of the Eurozone (such as the decreased number of hours worked compared to other countries and the ageing of the population) were traded off for better welfare and quality of life. Consequently, they should be ascribed to the preferences of Europeans compared to those of other countries.

Compared to ideal blueprints, reality always presents idiosyncratic features, and elements and processes of change are ridden with unforeseen events and unintended consequences. In spite of a shared ideal blueprint backed by strong political will and ideal and institutional commitment, the European move to economic and monetary unification was bumpy, sometimes ineffective and inefficient. So far, the outcome was both impressive and problematic, both forward looking and ridden with asymmetries and incompleteness. These contradictions may jeopardise the sustainability of the present setting and future developments, particularly if external tensions are strong and the situation of individual member countries is progressively polarised, thus creating important internal tensions. It is therefore necessary to take a detour and look at how the European integration evolved in different fields — from macro-institutional to micro-industrial — in order to understand how this could happen and why. This is important in order to assess consequences and problems and look for ways out.

Policies in the Eurozone are tailored to the implementation of the common rules as devised in the Stability and Growth Pact (SGP). The SGP was based on a short-run set of conduct rules and practices, motivated by the need to make all member countries converge to a financially sustainable situation in an institutionally incomplete context. The alternative possibility of proceeding through intercountry transfers was ruled out to avoid moral hazard and the fundamental lack of mutual trust and even fiscal equalisation seem to be far away. Unfortunately, a deep problem undermines the sustainability of the Eurozone: in a regional integration made of partially sovereign economies in different economic conditions and with diverse national institutions, there is an urgent need for institutional and structural, long-term reforms and policies to foster the convergence of the real economies and financial situations. It is only on the bases of these policies that short-term stabilisation policies can be sustainable and fruitful.

The peculiar framing, together with the incompleteness of the institutional construction put Eurozone policies into an uneasy situation. In vulnerable countries, policies had difficulties in pursuing their primary objective of balanced finances. Indeed, they worsened economic performance and caused problems for which there apparently are no policy remedies. Moreover, the shared competences of Eurozone organs and national governments are sources of economic and political conflict. Last but not least, political and social dangers are wandering in the skies of the Eurozone.

In the perspective of the monetary union, the European Union (EU) envisioned a common monetary policy that could deal with symmetric shocks, and national fiscal policies for taking care of asymmetric shocks and national idiosyncrasies. This approach was the only pragmatic solution available, given the incomplete institutional construction of the union and the nearly irrelevant and structural role of the common budget. Particularly limiting were the lack of a common government of the economy and of a lender of last resort, the provisions of no-monetisation and no-socialisation of the deficit and debt and the no-bailout clause. Even fiscal equalisation was actually rejected, except in the indirect, partial and mild form allowed through the common budget.

The incomplete monetary unification created a new situation, which governments and economic operators could only comprehend with time. This was particularly the case in those countries that had previously used depreciation as a means of solving problems of competitiveness. In noncompetitive sectors, the transition to the new common currency created favourable conditions for businesses for adjusting prices upwards in the new currency. In the economically favourable conditions of the first years of monetary unification, wages and salaries could be adjusted upwards in countries that had lower levels, often independently of productivity. A kind of convergence to the highest and most expensive was led by a Eurozone demonstration effect that the common currency could carry on. The most active in this sense were primarily economic operators in vulnerable countries.

During the crisis, the Eurozone tested and proved its resilience, yet the monetary union is at a crossroads. Access to larger and more liquid financial markets and larger and more competitive goods markets at lower interests and prices are sizeable advantages for the Eurozone member countries, their governments, firms and financial organisations, and their consumers. Yet these advantages are overshadowed by sizeable disadvantages and costs in terms of lost output and unemployment. Monetary integration has demonstrated itself to be backed by remarkable popular and political support, along with the more obvious support of the business community. Yet recurrent crises still loom.

The following sections are included:

• Bibliography
• Index