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When the panic has abated, argues Edward Carr, the euro zone must redesign its
currency
Nov 16th 2011 | from The World In 2012 print edition
Broadly speaking, two tribes have skirmished with each other during the euro
crisis: the markets and the politicians. In 2012 the battle will become a lot
more complicated, as the politicians splinter into factions. It sounds
dangerous and it is but thrashing out political arguments is an essential part
of bringing the crisis to an end.
Amid the banks plunging shares and the soaring yields of government bonds, it
is easy to lose sight of the political questions being asked of Europe. Markets
have forced Europe s troubled economies to confront austerity and reform, but
politics will determine how they do so. Markets have demanded that Germany and
other creditor nations finance a rescue, but politics will decide what they
demand in return. Markets want a revamp of the euro s governance, but politics
will ordain how energetically the European Union embraces federalism.
Austerity and a rescue are now under way, though a descent of Greece into
anarchy could yet throw them off course. But the third element renovating the
governance of the euro is still highly uncertain. In 2012 Germany s Angela
Merkel and her fellow euro-zone leaders will set out the sketches for that
design.
If you were sitting down with a blank sheet of paper, you would advise the euro
zone to complement its one-size-fits-all monetary policy by pooling sovereignty
and creating new institutions. You would set up a European mini-IMF (call it an
EMF) with enough funds to tide over troubled countries as they adjusted their
economies. A pan-European banking regulator and a bail-out fund could ensure
that large European banks were not at the mercy of their vulnerable sovereign
borrowers. To stop the markets from picking off weaklings, you might organise
centralised borrowing in which all countries jointly stood behind the debt of
each government. And, to stop spendthrift governments from exploiting these
mechanisms, euro-zone countries would agree to submit their fiscal policies to
the say-so of everyone else.
It amounts to a blueprint for the United States of Europe. And it is utterly
beyond reach.
For starters nobody can agree on which central authority should hold all these
new powers. France and Germany would refuse to boost the European Commission,
which they mistrust. Smaller countries and Germany s constitutional court would
refuse to endow an ad hoc intergovernmental council. Many national leaders
heartily detest the European Parliament.
Moreover, many governments are nervous about other euro-zone countries having a
say about their own public spending. And the entire EU was scarred by the
eight-year-long attempt to restructure the union, first by writing a new
constitution rejected and abandoned and later by repackaging the constitution
into the Lisbon treaty, which limped into force in 2009. You do not find much
appetite in Brussels for a repeat performance.
Shape up, for the euro s sake
Where does that leave the redesign of the euro? Euro-zone governments have
agreed that leaders will meet at twice-yearly summits. They have set up a
proto-EMF and a European Banking Authority. And they have agreed to monitor the
economies of euro-zone members in a souped-up Stability and Growth Pact.
New sanctions might require a new treaty
But more is needed, especially with sanctions. Some could be enforced at the
level of the nation. Euro-zone members might have to write caps on deficits and
debt into their constitutions, or create independent offices of statistics and
budget sustainability, rather as they must have an independent central bank
today.
Ultimately, though, new sanctions might require a new treaty. But new treaties
take a long time. Countries can weigh them down with their own agendas
(Britain, for instance, wants to repatriate powers even though it is not a
member of the euro zone). And referendums can reject treaties (just ask the
Irish).
These difficulties have answers and the EU has had more than enough practice in
fashioning compromises out of unpromising ingredients. But if the euro zone
gets it wrong in 2012, it will be laying the foundations of the next currency
crisis.
Edward Carr: foreign editor, The Economist
from The World In 2012 print edition