WORLD VIEW:THE LAST time I was in Maastricht was for the European summit in December 1991 which negotiated the eponymous treaty there on economic, monetary and political union. Returning for a conference on EU-Asian relations proved salutary in a week when the world finally woke up to the potentially destructive effects of a euro collapse. From China, India, the United States, Brazil and Russia came calls for urgent measures to prevent this happening.
At that time I reported a colleague’s remark that European integration “is not an abstraction for these people”. The ancient and picturesque Dutch city of 130,000 people, capital of Limburg province, is wedged between Belgium, Germany, Luxembourg and France on the river Maas/Meuse. Well known for its historical, linguistic and cultural diversity, it is home to many international and educational organisations.
In a column about the treaty written from the city then, I noted that although it involved an irreversible transition to economic and monetary union it was “lopsided in that the monetary element surpasses the economic one, while both are much more developed than the commitments to economic and social cohesion and social legislation”. It would be “foolish to underestimate the dynamic required to correct these asymmetries, but it is not impossible” this would happen.
The then EC budget of 1.2 per cent of its gross domestic product would need to be increased by two or three times if the necessary fiscal federalism and income equalisation was to be achieved. Even if that was done, however, the primary responsibility for economic decisions would remain national, creating a problem about how “to dovetail them in a more and more interdependent world”.
Those several challenges are now well and truly on the EU’s agenda. Several key assumptions used to justify the incomplete design of monetary union – including the neoliberal efficient market hypothesis about optimal outcomes from open markets; the German one that austerity policies rather than credit extended by core member states and institutions would resolve imbalances; and the view that peer group pressure rather than market discipline would be sufficient to police its banking and other rules – have been shown badly wanting by the scale and pace of recent events.
The euro is now the world’s second international currency after the US dollar, making it of major significance for market transactions, central bank holdings, pension funds, insurance companies and government agencies. There are more euro in value than dollars circulating this year – €820 billion against $940 billion. The emergency sums required to provide a buffer for the euro well outstrip the extent of German reparations after the first World War and of Marshall aid from the US to Europe after the second one. About one-third of China’s $3.2 trillion overseas currency holdings are in US treasury bonds, but up to one-quarter are in euro, giving them a real interest in the euro’s survival as an alternative reserve currency in a more multi-polar world.
Such global aggregates and dynamics explain the flurry of international pressure accumulating on political leaders of the euro zone. This week Barack Obama and Timothy Geithner are demanding action to shore up the currency, as are Christine Lagarde of the International Monetary Fund and leaders of the Bric group of emerging economies. Emergency action to provide liquidity for money markets and banks came from the European Central Bank, the US Federal Reserve, the Bank of England, the Swiss National Bank and the Bank of Japan.
There are widespread fears that French and German banks would be exposed by any Greek default, raising the question of how they would be bailed out and by whom. Such uncertainty over banking makes it even more difficult to contemplate appropriate international action to avoid a deeper recession.
The huge costs of allowing the euro collapse or fragment greatly outweigh what is required to fix it. But political will and leadership are lacking, especially in Germany, which has yet to decide whether the euro’s survival on different and less advantageous terms than those agreed at Maastricht is fundamentally in its long-term interest. For Germans the costs of a non-euro or a narrowly northern European one would include a much higher exchange rate, sharp falls in export profits and a deep economic and financial shock at home.
The alternatives include redesigning – or completing – the Maastricht formula by eurobonds to collectivise risk; more fiscal federalism to fund transfers; and stronger central institutions to run the system. All this would also require revisiting and reanimating the democratic elements of the political union also agreed at Maastricht, which have been sidelined by the recent surge of inter-governmentalism that empowers the larger states especially.
Significantly, the main German opposition parties, the Social Democrats and Greens, favour redesigning the euro in these ways and are gaining public support for such a programme. Similar changes are occurring in France. So if it is still foolish to underestimate the political dynamics required to fix those asymmetries, it is by no means impossible it will happen.