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UNITED, THEY'RE DIVIDED.
A coalition of the able and willing -- the former qualification being much more important than the latter -- should retain the euro but cut loose the currency's weaker members. All of the architecture needed to make a success of the common currency can then be built, including a full banking union, common bond issuance, a centralized Treasury function with an empowered finance minister, and properly coordinated fiscal policies.
Creating a two-tier Europe would offer a potential way out from the threat posed by the U.K.'s Brexit vote because, as damaging as the referendum result may be for Britain, it also poses political risks for the remaining members of the bloc.
In an interview with Bloomberg News, Finnish Finance Minister Petteri Orpo says the biggest danger after Brexit is that Britain and the EU-27 can't agree and the uncertainty damages the euro area and growth. The divorce negotiations will likely expose deep divisions in how different EU countries (and their voters) view the union. Creating a second tier of membership that Britain and others could sign up for, distinct from the original unification dream, would be a recognition that one size doesn’t fit all in Europe, either politically or economically.
The outer group could maintain single-market access but would no longer impose a burden on the economically stronger core. The core could no longer rely on a de facto currency devaluation to export cheaply to the periphery.
Deciding who stays and who goes would be far from easy. The Maastricht criteria, designed to ensure that only countries whose debts and deficits were under control could adopt the euro, was always a political construct doomed to failure by fudging. But better to risk a political fight now —using Brexit as a convenient excuse for a reckoning — than allow internal pressures to blow the euro part.
Nobel prize-winning economist Joseph Stiglitz also thinks the current situation is unviable, but his solution is to allow individual countries to have their own version of the euro. The idea seems seems at best cosmetic and at worst unworkable.
In an extract of his new book published by Vanity Fair this week Stiglitz reviews the arguments of having a currency area shared by countries that pursue individual fiscal strategies and whose economies diverge in many ways. The existing system, Stiglitz argues, is "creating within Europe the same kind of rigidity that the gold standard had inflicted on the world."
He's correct; allowing Greece to continue wearing the straitjacket of euro membership, for example, seems downright cruel when it removes the currency flexibility that would help it tackle an unemployment rate that's been north of 20 percent for half a decade. The euro zone lacks, for example, an institution that can provide large-scale funding for infrastructure projects specifically for an economically ailing member. What efforts do exist are too small-scale: While the European Central Bank sets monetary policy for all of the members, the EU's budget is only 1 percent of the region's gross domestic product, compared with federal spending in the U.S. of 20 percent of GDP.
But it's hard to see how that would be solved by allowing Greece to have its own "flexible euro" which can "fluctuate, but within bounds that the policies of the euro zone itself would affect." Any hedge fund worthy of the name would immediately line up to attack the new currency, picking off the weaker countries one by one.
Stiglitz's proposed system looks remarkably like the European Exchange Rate Mechanism which tied currency values together in a grid in the years prior to the euro's introduction. In truth, the ERM never worked very well; the temptation to devalue on a regular basis proved too tempting to the likes of Italy, and the resulting waves of speculative attacks in the foreign exchange market were both politically and economically damaging.
Stiglitz presents his solution as the magic middle ground between two disastrous alternative scenarios: a return to the status quo and a politically nonviable "all in" approach that created a fiscal union to support the single currency.
Neither breaking up the euro bloc nor trying to impose deeper integration on all of the nations involved is an acceptable way forward. But a smaller common-currency club combined with a wider trading arrangement for those who want or need the flexibility and sovereignty of their own currency and their own central bank would have a better chance of success than the halfway house proposed by Stiglitz.
