The Green European Foundation was, alongside the Hungarian foundation OMA, one of the main organisers of the CEE Green summer academy. Over six days of intensive discussions, the academy touched upon core issues of today’s triple economic, social and environmental crises. In 2012, one of the focuses of GEF’s work is documenting debates on the future of the European Union, thus putting the crises and the solutions put forward by the Greens in a broader European context. Against this background, we take a closer look in this article at the panel debate on the future of the European single currency. You can read more on the Green summer academy here.

The profound debt and financial crisis in the euro-zone casts shadows on the promising European Union integration project. Europe today seems to be synonym with crisis. In this context, the panel debate set out to answer the key questions of how could the common currency survive and how can the ever growing differences between “core” and “periphery” be bridged. The two panelists, Peter Rona and Reinhard Buetikofer, expressed contrasting visions on the euro and its future, which made for an interesting debate.

Is the euro a currency designed to fail?

Mr. Rona’s analysis of the current crisis in Europe pointed out that a seriously misdesigned euro is destroying a viable European Union. The premature introduction of the euro stands at the basis of today’s euro-zone crisis, which has a good chance of destroying the European project in its ensemble. This is because the common currency, introduced by the Maastricht Treaty, reunited countries with huge structural differences in their economies. A “core” group of countries, highly industrialised, benefitted from strong, viable export-based economies, with top notch infrastructure, whereas “the periphery” had economies largely based on agriculture and tourism.  Given such contrasting initial conditions of the economies that joined the currency union, Peter Rona argued that it was clear already from the outset that the euro would only aggravate the economic imbalances differences. The common currency was undervalued in competitive countries and overvalued in the periphery, which allowed for trade surpluses to be formed in countries such as Germany, whereas periphery countries turned to debt. The mispricing of assets and the misallocation of resources lead to the indebtedness of the periphery.

In contrast, for Reinhard Buetikofer, the core of the crisis is a political one, regardless of the shortcomings in the construction of the euro. The introduction of the euro at the moment of the Treaty of Maastricht was a political necessity, a “necessary mistake” in order to keep European integration on track. For Germany, the introduction of the euro meant the sacrificing of the Deutsche Mark – a sacrifice not to be undermined. This allowed Germany’s unification, but at the same time offered the guarantee of Germany’s European commitments. However, it is not the construction of the euro that is at the basis of the crisis, but rather the massive deregulation of the banking system that lead to the “too big too fail” banks and to their ulterior bailout. The obvious solution here is to regulate the financial sector.

Was the euro-zone crisis predictable and preventable?

The euro was built on the model of the Deutsche Mark, as a condition for Germany’s joining the eurozone. Peter Rona argued that this implied that the euro was constructed to reflect the circumstances of the German economy. A key feature was the low inflation and interest rates in the eurozone, which allowed for Germany’s financing of the reunification. Lowering interest rates however have had disastrous effects in periphery countries, where the interest rates became lower than the rates of inflation.

Given the structural differences between European economies at the moment of the creation of the euro, core economies had a considerable advantage given the low inflation rates, as periphery countries could not bring up their economies in the absence of higher inflation. The low interest rates created positive effects in core countries that invaded periphery countries with their liquidity, which in turn created the “bubbles”. Assets prices kept rising until the bubbles burst, and today we are experiencing the consequences. In this sense, Mr. Rona concluded that the euro-zone crisis was predictable and inherent to the construction of the common currency, for which Germany has a historic responsibility.
  
In reply, Reinhard Buetikofer retorted that Germany has a dominant, but not hegemonic role in today’s Europe. As regards the construction of the euro on the model of the DM, this was the only way that at the time the euro could be accepted by Germany; any other construction would have not included Germany. The narrative of Germany’s pursuit of its national interest in the construction of the euro is not factual, but merely anti-German moralising.

Is corruption a factor in the euro-zone crisis?

The two panelists were again on contrasting positions. Peter Rona proved skeptical that corruption is a real issue influencing the crisis, arguing that currently core countries are justifying the crisis via a moral discourse- e.g. irresponsible spending in periphery countries, mismanagement of funds, corruption etc. This discourse is the result of a colonialist type of response of core countries in their search for a moral authority over the periphery. Mr Rona concluded that corruption in the periphery is a consequence of poverty and not vice-versa.

Portraying periphery countries as stuck in a tragic, historic trap is wrong and misinterpreting, answered Reinhard Buetikofer. In countries like Greece, it is obvious that extreme corruption and misallocation of budgets (e.g. very high military spending - 4% of budget) aggravated the crisis. He further argued that structural differences in a currency union will not necessarily lead to a failure of the common currency (e.g. Bavaria in the ‘90s that managed to raise its economy and be among the richest German regions today). The lack of strong European political framework is the real threat to the survival of the common currency. The euro thus needs a new governance structure. 

Is a fiscal federal construct possible in the EU?

Both panelists appeared to agree that we are very far from fiscal federalism in Europe. Peter Rona commented that for fiscal federalism to happen, a democratic political unification would have been needed in the first place. Beyond that, fiscal federalism would imply being confronted with key issues such as deciding national budgets together, setting taxes together etc. In the current construction, this is impossible. Furthermore, which actor would be deciding on fiscal policy? It is clearly not a role for the ECB, due to a lack of democratic consent.

Reinhard Buetikofer agreed that fiscal federalism is impossible at the moment, but pointed that there is a big space of possibility between this level of federalism and the current situation. Economic governance should not be left to the European Commission, which is an unelected body. The alternative is exercising economic sovereignty as a group, which is already happening via the European semester. The European Parliament should be involved in economic governance, which should be discussed jointly by national parliaments and the EP. Economic governance should strengthen European democracy and not hamper it, as it is currently happening with the fiscal compact, in which the Parliament’s role has been minimized. The commissioner in charge of economy should be voted directly by the European Parliament and not only as part of the Commission as a whole as it is currently the case. 

Short term perspectives for the euro: is a Greek exit likely?

Mr. Rona argued that a Greek exit would prove the failure of the euro, but that Greece cannot actually stay in the euro-zone under the current conditions. He concluded that from its construction, the euro was inherently designed to fail.

In his turn, Mr. Buetikofer suggested that a Greek default and its exit from the eurozone would cause losses of € 80 billion to the German federal budget (1/4 of the total federal budget). But beyond the numbers, the key issue with the Greek exit is a political one. Once a break is possible in the euro-zone, nothing can be credibly guaranteed anymore. It can mean the end of the common currency. However, opinion polls suggest that 80% of the Greeks want Greece to remain in the eurozone and the crucial elections in June showed that Greeks are willing to go the hard way and keep their commitments. Greece needs more time to implement its reforms, and for the common currency to survive, Greece’s rehabilitation needs to be financed.

GEF's 2012 Future of the EU project

Throughout 2012, GEF, with support of national Green foundations across Europe, will confront national debates on Europe and highlight the Green visions for the future of the Union and for the future of a social Europe. The objective is to organise events on the topic in several countries and to report them on this web dossier. Articles on these debates will be published on a regular basis, with the aim of feeding a EU-wide Green debate on the topic.