Published on August 14th, 2012 |
by Katharina Obermeier
Image ©
[caption id="" align="alignnone" width="566"]
Jaques Delors, often referred to as the father of the euro © European Parliament[/caption]
Despite the many obituaries that have been written for it by journalists, politicians, and commenters, the European Union’s single currency is still alive. In fact, its continued resilience throughout the years of crisis has surprised analysts again and again. But given the bleak situation in Spain and Greece and the disagreements among eurozone members, how long can the euro last in its current form? Does it have a future at all, and if it does, what will it look like?
Of course, many argue that the euro was a deeply flawed idea to begin with, and that it is only natural for it to come crashing down now. They expect the eurozone countries to abandon the single currency, and return to their original national currencies. However, to anyone who has studied the monetary history of the EU, this scenario seems very unlikely. Ever since the Bretton Woods system collapsed, European countries have always striven to create stable exchange rates between their currencies in order to make commerce and investment in the single market easier and more predictable. The euro is simply the logical conclusion of these efforts, pursued over decades. Therefore, even if the euro in its current form was dissolved, European countries would quickly enter into a new monetary system which would tie the values of their currencies close to one another, thus effectively planting the seeds for a new single currency among them.
Others, who blame the crisis on the inherent economic instability of members such as Greece and Spain, argue that these countries should leave the eurozone – or be forcefully ejected from it. While this line of reasoning is convincing, especially given that certain countries were probably not ready to join the eurozone when they did, it ignores the issue of what would happen to them after this exit or expulsion. According to advocates of this strategy, Greek and Spanish economies would surge as their new currencies would weaken against the euro, thus fuelling their export economy. However, it seems more likely that the values of their currencies would plummet to such an extent that they would soon be unable to pay their external debts and plagued with unsustainably high levels of inflation, which would make economic recovery extremely difficult. And it would be very naïve to imagine that the remaining eurozone members would be spared from side effects – history teaches us that contagion in economic crises is often irrational and could easily continue to affect the eurozone long after it disassociated itself from the more problematic cases.
As an alternative to the scenario described above, some analysts have suggested two euro currencies: a “Northern euro” for more economically stable countries and a “Southern euro” for those more prone to crisis. However, it is hard to see how putting all crisis-struck countries in one currency union would be a good idea – again, it seems most likely that this “Southern euro” would lose value very rapidly and bring high levels of inflation to all countries in this category, even those whose economies are on the mend.
So, what else could happen to the euro? It could undergo substantial changes in relation to governance and criteria for adopting it, making countries adopt higher standards in order to become part of the eurozone. It could become tied to greater EU oversight of national budgets (with perhaps a future role for the European Parliament) and more strictly enforced rules concerning state debt. Or it could become the connecting dot for closer economic and political union amongst eurozone countries, through mechanisms such as debt mutualisation, deposit insurance and banking resolution funds, and harmonisation of fiscal policies. In any case, it seems most likely that the euro will survive, in whatever shape and form eurozone leaders can agree on, and even grow, as Latvia and Romania are slated to adopt the single currency in the next couple of years. Beyond that, who knows?
The Future of the Euro
Jaques Delors, often referred to as the father of the euro © European Parliament
Despite the many obituaries that have been written for it by journalists, politicians, and commenters, the European Union’s single currency is still alive. In fact, its continued resilience throughout the years of crisis has surprised analysts again and again. But given the bleak situation in Spain and Greece and the disagreements among eurozone members, how long can the euro last in its current form? Does it have a future at all, and if it does, what will it look like?
Of course, many argue that the euro was a deeply flawed idea to begin with, and that it is only natural for it to come crashing down now. They expect the eurozone countries to abandon the single currency, and return to their original national currencies. However, to anyone who has studied the monetary history of the EU, this scenario seems very unlikely. Ever since the Bretton Woods system collapsed, European countries have always striven to create stable exchange rates between their currencies in order to make commerce and investment in the single market easier and more predictable. The euro is simply the logical conclusion of these efforts, pursued over decades. Therefore, even if the euro in its current form was dissolved, European countries would quickly enter into a new monetary system which would tie the values of their currencies close to one another, thus effectively planting the seeds for a new single currency among them.
Others, who blame the crisis on the inherent economic instability of members such as Greece and Spain, argue that these countries should leave the eurozone – or be forcefully ejected from it. While this line of reasoning is convincing, especially given that certain countries were probably not ready to join the eurozone when they did, it ignores the issue of what would happen to them after this exit or expulsion. According to advocates of this strategy, Greek and Spanish economies would surge as their new currencies would weaken against the euro, thus fuelling their export economy. However, it seems more likely that the values of their currencies would plummet to such an extent that they would soon be unable to pay their external debts and plagued with unsustainably high levels of inflation, which would make economic recovery extremely difficult. And it would be very naïve to imagine that the remaining eurozone members would be spared from side effects – history teaches us that contagion in economic crises is often irrational and could easily continue to affect the eurozone long after it disassociated itself from the more problematic cases.
As an alternative to the scenario described above, some analysts have suggested two euro currencies: a “Northern euro” for more economically stable countries and a “Southern euro” for those more prone to crisis. However, it is hard to see how putting all crisis-struck countries in one currency union would be a good idea – again, it seems most likely that this “Southern euro” would lose value very rapidly and bring high levels of inflation to all countries in this category, even those whose economies are on the mend.
So, what else could happen to the euro? It could undergo substantial changes in relation to governance and criteria for adopting it, making countries adopt higher standards in order to become part of the eurozone. It could become tied to greater EU oversight of national budgets (with perhaps a future role for the European Parliament) and more strictly enforced rules concerning state debt. Or it could become the connecting dot for closer economic and political union amongst eurozone countries, through mechanisms such as debt mutualisation, deposit insurance and banking resolution funds, and harmonisation of fiscal policies. In any case, it seems most likely that the euro will survive, in whatever shape and form eurozone leaders can agree on, and even grow, as Latvia and Romania are slated to adopt the single currency in the next couple of years. Beyond that, who knows?
About the Author
Katharina Obermeier Katharina considers herself a German-Canadian hybrid. She grew up in Germany and completed her BA in International Relations at the University of British Columbia in Vancouver, Canada. Politics, especially in relation to concepts of nationality, have always fascinated her, and she is particularly interested in international political economy. During her studies, she was an avid participant at Model United Nations conferences, and helped welcome international exchange students to her university. She is currently completing an internship at a Brussels-based trade association and hopes to work in European affairs in the future. In her political writing, Katharina marries social democratic principles with a keen interest in the European Union and its implications for European politics and identity. She writes to counteract simplistic ideas about politics and economics, continuously attempting to expose the nuances and complexities involved in these subjects.
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