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It may not be the headline news, it was in the summer of 2012, but the eurozone is still in crisis. Unpopular technocratic governments remain in place, Greece and Cyprus are still propped up by Germany’s whims as lender, and unemployment remains spectacularly high in Spain. The upshot is a crumbling of support for the EU across the continent. There is a strong case to be made that the blame for Europe’s protracted woes can be placed squarely on the euro. Would dissolving the currency be good for the political union and common market?
Revealing the cracks
Arguably the global financial crash of 2007-2008 has exposed inherent flaws in the monetary union. While various members of the EU had different exposures to the crash, they lacked the monetary flexibility to react appropriately for their economy. It revealed fundamental issues with uniting wildly varying economies under one monetary regime. Without the ability to unilaterally devalue or even default, crucial measures were left unavailable to say, Greece, Cyprus or Italy, leaving them no option but to accept tough bailout conditions from a begrudging Germany.
When the primary means of recovery are monetary measures – low base rates and quantitative easing – the lack of ability to implement these on a national scale has revealed the stark contrast between the core European economies the euro is based on – Germany and France – and the rest of the EU. While the central-north economies show continuing nascent but solid growth, the Mediterranean contingent flounders. That’s not to say independent monetary controls alone would have saved struggling economies, but they certainly would have helped.
Economic woes, the ceding of national sovereignty by way of stringent austerity and unelected technocrats imposed by Berlin, and the tide of misery and unemployment left in their wake (bracketing the necessity of austerity) has seen a wave of nationalism sweep continental Europe. Marie Le Pen’s Front National is experiencing a resurgence in France, and is in talks with the Dutch Freedom party to form an anti-Europe alliance. Recent elections in Austria showed around 30% support for anti-EU candidates while Italy’s Five Star movement attracted 28% of the vote. Unsurprisingly, perhaps the highest opposition to the union is to be found in Greece. Even if none of these elements gain real influence in government, they could push mainstream parties into being more anti-EU in a bid to protect their base – witness the return of euroscepticism in the British Conservative party as response to UKIP.
Investors should be wary of these political movements, as they could have a very real influence on the continued existence of not just the euro, but the single market.
The curious case of Cyprus
Fractures in the euro are already beginning to show. As reported by the New York Times in July, capital controls in Cyprus have made moving money in and out of the country prohibitively difficult, even in euros. This, coupled with comparatively high interest rates have effectively made a Cypriot euro different from the rest of the continent. As Guntram B. Wolff, director of Brussels research group Bruegel put it: “the euro in Cyprus is still not the same as a euro in Frankfurt… [Cyprus has made a] silent, hidden exit.”
The fate of Cyprus is significant in a wider context for two reasons. Firstly because it is a glaring example of what is widely referred to as a ‘two-speed Europe’ – a chronic symptom of a flawed system. Secondly because it is a sign that the euro could already be breaking up without anyone having made a conscious decision.
Time to pull the plug?
The short-term shocks of dissolving the euro would be terrible. But in the long-term, it might just be the thing to save the common market and the political union. The former is indisputably a Good Thing – no one can doubt the advantages of freely moving goods and labour – and the latter a good thing in principle at least; it has been awarded a Nobel Peace Prize after all. It would put the onus of economic responsibility back on individual nations, dulling the power of a nationalist uprising against the reigns of Europe: potentially saving the EU and all its benefits in the process. Economically it would provide the greater monetary flexibility the smaller nations need to get back on their feet, and restore the common-sense link between fiscal and monetary policy.
A break-up would mean the loss of a major currency. But the re-introduction of old currencies would offer wider trading opportunities and relieve fundamental analysts of the burden of tracking 17 different countries to understand one currency. Many who agree that the euro should go also think the negative effects of a break-up outweigh any long-term benefits. But when even the founder of the euro, Oskar Lafontaine, is calling for its dissolution, it’s time to seriously consider the possibility.
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