Euro Lite

Could Europe benefit from less — not more — commonality? | “The euro needs to be saved from the Europhiles”

Peter Coy


“More Europe” is always the solution when leaders like German Chancellor Angela Merkel talk about Europe’s slow-burning financial crisis. To qualify for emergency aid, they say, countries like Greece and Spain must surrender control of their banks and budgets to supra-national authorities. Another brick of the “more Europe” edifice was cemented into place on Dec. 13 when finance ministers of the 17-nation euro zone agreed to unified banking supervision under the European Central Bank. That’s a step toward a banking union, which is a step toward fiscal union, which is a step toward, someday, political union.

But it’s hard to see the way to a United States of Europe when every move in that direction has Europeans at each other’s throats. Thousands of protesters took to the streets in Madrid and Barcelona on Dec. 17 in the latest demonstrations against austerity. Germans, meanwhile, complain that they’re being played for suckers by Spain and Greece. In a November poll, 46 percent of Germans favored letting Greece go bankrupt.

If ordinary Europeans balk at forming one happy family, must Europe disintegrate? Or is there a middle ground that would retain many of the advantages of unity while dodging the parts that make everybody mad? The coming year may answer the question of whether Euro Lite is a way out for the union or another false hope.

Some analysts argue that stopping short of full financial integration could make Europe more stable, not less. Avinash Persaud, chairman of Intelligence Capital Limited, a London-based financial adviser, says the real problem regulators need to address is controlling the booms rather than cleaning up after the busts. National regulators, he argues, might do a better job than a single, Europe-wide regulator of stopping excessive lending in one part of Europe. They weren’t vigilant enough in the last bubble, but Persaud is concerned that the European Central Bank will do worse. Its job is to promote commonality, making it “inherently averse” to enforcing tougher lending criteria in boom countries, he says. “Banks would pounce on rules limiting their lending in booming countries, accusing the regulator of fragmenting the single market,” Persaud said in an e-mail message. “The reins holding back the booms, already too loose, have just been loosened further” by the creation of a single banking supervisor, Persaud writes in an as-yet-unpublished article. “The euro,” Persaud says, “needs to be saved from the Europhiles.”

Another “less Europe” proposal would introduce national currencies alongside the euro. Mazen Skaf, a partner and managing director in the consulting firm Strategic Decisions Group, argues in a new white paper that nations such as Greece and Spain should have the option to issue new currencies for domestic transactions, including payment of salaries and benefits. Through a controlled depreciation, the nation’s labor and pension costs would fall. External debts would still be in euros. The plan would give countries “maneuvering space to drive monetary and fiscal policy on a local basis,” Skaf argues.

None of this is easy. Barry Eichengreen, an economist at the University of California at Berkeley who studies financial crises, says investors would regard the partial reintroduction of national currencies as a prelude to leaving the euro entirely — and yank their money out. He’s also skeptical of Persaud’s national-level regulation. He says a single bank supervisor would do a better job of spotting cross-border problems, such as the inflating of Spain’s and Greece’s bubbles by loans from German banks.

Finding the right balance between national sovereignty and a tighter union for Europe is the trick. Take banking regulation. Once the euro was introduced, a banking union with a lender of last resort became the logical next step: National central banks can’t bail out their economies once they don’t have their own currencies to lend. But Merkel and the Germans won’t go along with a bank bailout mechanism financed by euro-zone governments unless there’s fiscal union — i.e., shared budgets. Right now Europe is very far from sharing a budget. Spending by the European Union accounts for only 1 percent of the EU’s gross domestic product, vs. 23 percent for federal spending in the U.S. Eichengreen suggests the EU’s budget might expand to perhaps 4 percent of GDP — enough to shore up national unemployment insurance funds in times of severe recession or to fix or close banks as needed. Spending on that scale probably wouldn’t require approval by “a European Parliament that acquires all the powers of a full parliament,” he says.

Jean Pisani-Ferry, director of Bruegel, a Brussels-based think tank, sees both sides. He says Europe’s monetary union is unstable without banking and fiscal union. He also says believers in more integration “shouldn’t use any opportunity to push for ... building a federal Europe. You should look at what is necessary for the euro to work.” For Europe, that balancing act isn’t going away.

The bottom line Economists on both sides of the Atlantic are searching for a middle ground that would save the euro without going all the way to full union.


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