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April 11, 2005
The French Referendum And The Future Of The Euro
Wolfgang Munchau writes about his doomsday scenario for the euro (Financial Times subscription required):
It is almost impossible to overstate the importance of the French referendum on the European constitution for the future of the European Union. Last week, I argued that a No vote would bring the process of EU enlargement to an untimely end. But what about the economic consequences for the EU itself and the eurozone in particular? They may be even worse...
For the first time since the creation of the euro in 1999, we might be discussing what the European Central Bank and euro advocates have most dreaded: how long the euro might survive.
Without the prospect of eventual political union on the basis of some constitutional treaty, a single currency was always difficult to justify, and it might turn out to be even more difficult to sustain...
Even without an overarching economic rationale, however, the euro can be still justified for as long as progress towards political union continues - however slow and hesitant this may feel at times. Nor would it matter greatly if this process stretched beyond one's own lifetime. As long as everybody believes that the EU is moving in this general direction, it is perfectly legitimate for a monetary union to precede a political union even by decades.
But what if eventual political union suddenly seemed less likely than political fragmentation? Without the goal of some form of political union, could we still expect Germany or the Netherlands, for example, to be committed forever to a currency area whose monetary policies might not suit the economic conditions of their particular economies? Without the politics, the euro is not nearly as attractive.
This does not mean that the eurozone will face imminent collapse after a French No vote. It might survive several decades in the twilight of faltering European integration. But its life expectancy may soon be regarded as finite.
That warning seems overly dire to me, but I'm not an expert on such things. Any thoughts?
April 11, 2005 in Europe | Permalink
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Comments
Posted by:
godement |
April 11, 2005 at 11:19 AM
As godemont wisely professes, it is speculation to look ahead 70 years at the euro and the possible state of the international monetary system. Attributing the cause of the downfall of the euro to a "no vote" on the 29th of May referendum; is pure speculation.
On a more theoretical note, the concept of credibility is important in understanding the institutional construction of the euro. The currency could be thought of as not creidble if monetary union was to be jeopardised by political dis-intergration in a not too distant future. On top of that markets would react in a negative way to this possiblilty, adding to pressures for packing up the euro...
Personally i think this view is quite blown out of proportion if solely based on a possible no vote at the French referendum. Yes, possibly if you consider other dimensions within the euro : a governing council responsible for 25 countries' monetary policies is going to be problematic, budgetary needs for the enlargement countries, adapting the social models etc... Then there is cause for concern.
However there is a lot of ifs and maybes, with too many possible scenarios for the future.
Posted by:
jp |
April 12, 2005 at 08:30 AM
JP,
thanks for the "wisely", but it is GodemEnt, not Godemont. Fortunately or unfortunately, I am neither British nor noble !
Posted by:
godement |
April 12, 2005 at 09:31 AM
W Munchau expresses here what is often seen as the German view on Monetary unions, namely that they are doomed if they take place whithout political union, and that preferably political union should precede monetary union. A German Bundesbank boss (was it Tietmeyer, any Germans around correct me if memory fails?) resigned over this a little bit over 10 years ago.
The rationale for this view, which Munchau goes into somewhat is that different states may come to think that the monetary policy is sufficiently unsuited to their own specific needs - note that at present times the Netherlands and Germany would have somewhat conflicting needs in this respect - so that the disadvantages override the advantages. Of course, with political union, the possibility disappears as the monetary policy which is tailored to the average - mean, median ? - needs of the entire zone coincides with the political boundaries.
This argument is of course correct in principle. And, it is to be expected that a no vote in the referendum due to take place on May 29th would generate some market speculation about the likelyhood of precisely this. Certainy, some market analysts will seize upon such a scenario, which is attractively doomsday. I personally can't, (which I regret as I could use the noise) having already gone at length in a preceding comment on the reasons why I do not believe that this is likely in practice.
As I have mentioned before, the devil of these things is in the details. This is true with a lot of things that are theoretically possible. Now, I am quite incapable of speculating about something that might happen decades from now. As a matter of fact, as I look some 7 decades back, I become rather convinced that trying to look forward that far is a little bit pointless.
This is why I prefer to look in the short run - historical short run, less than 5 to 10 years -. And there, I ask myself who might find an advantage to leaving the Euro rahter than staying in. As I explained in a previous comment to a post (nowhere to run, march 30), I believe that the only possibility in current times would be France, certainly not Germany. Of course, the Netherlands or anyone else for that matter might think that a monetary policy that taylored only to their economy would be better adapted to their needs than one that taylored to the needs of the entire euro-zone. Until they reflected about which economies theirs was dependent upon.
Now, the real question in this post remains unclear at the moment. Does a French no mean the end of political union, however far in the future? For many observers, the answer to this is often predicated on a historical precedent, namely the fact that the French refusal of the Communauté Européenne de Défense (CED, European Military Union) in the 1950's signified the end of plans for military union for a good 50 years.
The counter-argument would rest on the observation that a 25 member political union was always doomed for failure, notwithstanding diverging strategic interests, as so many members were rather new even to the economic side of the EU. Some might argue that while 25 member political union suffered a set-back, perhaps a less ambitious (geographicaly speaking) union of members with more obvious common interests and resembling political, economic and social systems, say Eurozone members, might then become more likely. Or some might argue that, after a short period of handwringing and Götterdammerung, a new treaty would actually be negociated, adressing some of the reasons that had led the French to vote against the first one. There are those still who would expect that, through political changes that might take place in France and Italy within 2 years, that have already taken place in Spain, a new treaty might become more of a probability. And then there are those who count on political change in Germany to ring back an administration that is more pro-European than the present one.
It is simply too early to speculate. What we know is what we get with a French yes vote. We get the present treaty -provided we find a way to overcome the coming no vote from the UK. We also know what we don't get with a French no vote: we don't get a plan B because the European luminaries never even considered that they might be sent packing. So obviously, the aftermath of a no vote is fraught with uncertainties, with the only certainty being the production of doomsday scenarii.