Can the Euro Survive the Sovereign Debt Crisis?

Dr Adam Cygan, University of Leicester

On January 1st 2002, 12 of the then 15 EU Member States replaced their national currencies with the Euro.  In 2011 with EU membership at 27 there are now 17 Member States using the Euro and countries such as Poland are actively preparing to join in 2013.  To prepare Member States for the transition to the Euro the Stability and Growth pact was included in the Treaty of Maastricht 1993 which requires Member States to keep their budget deficits below 3% of GDP in all but exceptional circumstances. Failure to do so would result in sanctions, including fines.  Yet since the inception of the Stability and Growth pact many Member States, including Germany, have consistently run budget deficits which exceed the 3% level.

It is on these shaky foundations that the Euro has been built.  While many may view the EU’s problems as the consequence of poor economic management by feckless governments the reason for the Eurozone’s sovereign debt crisis and the bailouts of Greece, Ireland and Portugal is more complex.  It is the absence of a strong EU constitution which has contributed to this debt crisis. The Euro has intrinsically linked the economies of the Eurozone States, but this integration has been based on the unrealistic principle that all Eurozone States are equal partners.  While equality meant that States were prepared to join the Euro, the Treaty does not include appropriate constitutional mechanisms which guarantee the necessary political and legal accountability required for this pooling of economic sovereignty.  For example, France and Germany have persistently flouted the Stability and Growth Pact and the Council, in which these two Member States are dominant forces, chose not to accept the Commission’s recommendations that they should be fined for doing so. The European Court of Justice reviewed the Council’s decision, but sidestepped the question of the fines reinforcing the weak nature of the institutional framework regulating the Eurozone.

Though the European Central Bank (ECB) is an important Institution governing the Eurozone its priority is to deliver price stability through the management of interest rate policy. This blunt instrument of economic regulation is found wanting in 2011 where a one size fits all interest rate policy is inappropriate for economies at different stages of development. Through interest rate policies the ECB does not offer political direction to the Eurozone countries and does not have the power to determine Member States’ priorities for taxation and spending.  The ECB is detached from the realities of delivering expensive social and welfare policies which have become expected within the Member States and which form part of the idea of a  ‘social Europe’.

As a currency the Euro remains strong, indeed anyone travelling to a Eurozone country from the UK is receiving 30% less for the pound in their pocket than they would have in 2006.  However, the Eurozone is undergoing a two-speed economic recovery which is likely to result in a realignment of political and economic power. The principle of equality that has hitherto underpinned the Eurozone has been abandoned. Strong economies such as Germany have significant leverage over the weak economies of Greece and Portugal.  Thus, the vacuum left by the absence of a constitutional framework to regulate the Eurozone has been filled, but this has arisen by default rather than by design.

The EU bail-out package and the ad-hoc response to the debt crisis illustrates that the Eurozone, and the EU more generally, will now be dominated an inner core of strong economies.  These economies will inevitably place their economic priorities before those of the weaker States.  Member States that remain outside the Eurozone are reluctant to write blank cheques. Germany the strongest growing economy in the Eurozone is also making any financial assistance dependent upon simultaneous economic reform. This is the new political and economic hierarchy within the EU which has arisen because the Treaty did not include adequate constitutional control of the Eurozone. Though this realignment means the Euro is likely to survive, the EU will have moved much closer to becoming a multi-speed organisation.

Dr Adam Cygan is a senior lecturer at the School of Law, University of Leicester and Director of the EU Law Distance Learning Programme

He has recently completed a monograph with Professor Erika Szyszczak to be published as part of the Sweet and Maxwell Understanding Law series. Understanding EU Law examines the themes and principles of EU integration from the Treaty of Rome to the Constitutional Treaty.

His research interests include the relationship between national parliaments and the European institutions within the context of the legislative process. He also researches the process of eastward enlargement of the EU and in particular the impact this has on the EU’s relations with its eastern neighbours. He has published two monographs on the subject of the United Kingdom Parliament and its participation the EU legislative process and has contributed to several Parliamentary inquiries in to the subject.

7 Comments

  1. Caroline Blainey
    Posted 18/07/2011 at 18:47 | Permalink

    Very interesting discussion, all coments are relavent and well thought out. This weekend I was listening to a radio discussion which suggested that there is a move to adopt a “world currency”. This may be an opening for a wider discussion. I am from the US by the way.

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    LXmoderator Reply:

    Thanks for the kind words, Caroline. Good to have you on board.
    The Moderator

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  2. Alex Brooks
    Posted 09/06/2011 at 10:22 | Permalink

    How can a multi-speed organisation ever work if there is not a unified constitution from which ALL policy flows? It’s all very nice and neat-looking to separate economic activity from ‘other’ activity, but let’s face it, pretty much all activity of any type has economic implications on some level. One cannot then ignore the blatant fact that economics relies on the ‘trickle up’ notion that every individual’s economic activity affects economic decisions on an increasingly large scale as individual decisions amalgamate whilst one moves up the supply chain.

    The issues that the Eurozone is facing now were inevitable from the moment that the single currency was introduced with the absence of harmonisation of social and fiscal policies among its members. Any expectation that the system would work to the benefit of all member States was at best negligently myopic and at worst fraudulent misinformation on the part of the stronger economies, i.e. Germany and France, since Portugal, Ireland and Greece are now tethered by commitments that they cannot possibly fulfil without tangible recognition by ALL Eurozone member States that, with the single currency, they are no longer sovereign States. It’s all very well Germany reporting healthy growth, but they must be prepared to share their fortune willingly with those with whom their own currency is also dependent.

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    Chris Williams Reply:

    There is no reason why different states in the union should not vary in their wealth as with Kentucky and California in the USA. The difference is in the amount of freedom Kentucky has to borrow within the union an the amount Greece has but also the attitude of the union to debt. The USA has a 12 trillion dollar fiscal deficit and a similar trade deficit. Europe would never countenance such debt. The result of this is that Greece has to borrow at much higher rates of interest than Kentucky because the lenders know the Union will support it but they doubt the commitment of European Union to support Greece.

    Stricter controls on borrowing and more cohesion on debt not greater federalism is all that is required. Conform or be expelled. No civil wars are required. We have no need to be precious about who is in the union and who is not. Hang on to those drachmas Toby but don’t write off the Euro just yet.

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  3. John Newell
    Posted 29/05/2011 at 05:39 | Permalink

    Sure the Euro will survive, if not then some other common currency will overtake it and europe will be the poorer for it. The Euro is a great opportunity to encourage hunanity to see that it is one society which will not prosper to its potential until it lives in peace with itself 🙂

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    Toby Reply:

    But if they don’t see themselves as one society, then the Euro won’t succeed.

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    Chris Williams Reply:

    Do the Americans see themselves as one society? It is true they are very patriotic but they are also very hyphenated (Black, Latino, Polish, German, Native, Christian – the list is endless). Does a computer programmer or film executive in California care about a coal miner in Virginia unless that is where he was born?

    There is a collective memory about an extremely bloody civil war that binds the states together. Likewise there is a collective memory in Europe about two world wars that binds the union together. It is that same collective memory that binds Britain closer the the United States than it does to Europe, to say nothing of language and economics. But in Europe that collective memory can be relied on to hold the states together. Even Switzerland has, so far, voted (in referendums) to be bound by each and every new European law because the Swiss understand their common interest lies with Europe. This combination of collective memory and enlightened self interest can be relied upon to keep the Euro in place.

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    Ioannis Kourniotis Reply:

    An interesting article on this debate…http://www.heptagonpost.com/Bensted/Can_the_Euro_Survive%3F

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  4. Chris Williams
    Posted 28/05/2011 at 07:48 | Permalink

    We can only speculate but I think it will survive. The European institutions will reform and management will be improved. On a lighter note, I am surprised that Italy is alone amongst the ancient empires not requiring support. I have put it down to the success of the Fiat 500.

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  5. Frank Dawson
    Posted 28/05/2011 at 06:46 | Permalink

    The retirement age in Germany is moving to 67. In Greece it’s 63. The Euro won’t survive in the long run until social and fiscal policies are also unified. And Europe is showing no appetite for that.

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  6. Toby
    Posted 24/05/2011 at 12:39 | Permalink

    The Euro won’t survive. At least not in its current form.

    For a single currency to exist you have to have a single monetary policy.
    And that means individual nation states can’t use interest rates and devaluations to deal with recession. So in a diverse geographical area, the only way this can work is if tax payers in one part of the area are prepared to pay to subsidise development in another.

    The USA has a single currency but New Yorkers, Californians and Alaskans have a shared sense of nationhood and are prepared to share the endeavour.

    Europe isn’t one nation. Taxpayers in Germany aren’t prepared to endlessly bail out the PIGS. So the only way forward for Greece et al is to exit the currency and take control of their own monetary policy. Otherwise not only the Euro, but the entire European project will fail.

    This is good news for me as I have £40 in drachmas left over from a nineties holiday in Corfu I can then spend….

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    Ioannis Kourniotis Reply:

    I was under the impression that this was a serious forum for exchange of ideas…

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    Chris Williams Reply:

    Clearly you gained the wrong impression. Discourse works on many levels.

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  7. Ioannis Kourniotis
    Posted 24/05/2011 at 09:27 | Permalink

    This is very informative and I think that it captures the essence of the problem.
    It is interesting to foresee that European Union will become a multi speed organisation however it may be also interesting to foresee how this organisation will be ultimately governed.

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