Never mind the drama. The euro’s here to stay
To read the apocalyptic news headlines, Europe appears to be in disarray, on the brink of financial meltdown, its currency a sure victim of political disintegration.
But the doomsday will not happen: The euro is here to stay. What’s more, it will soon overtake the U.S. dollar as the prime reserve currency and the most traded currency globally. You can take that fact to the bank.
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Here’s why: Even after the financial crisis, Europe is still the most vibrant economic region in the industrialized world and the euro is solidly rooted in 60 years of history. The continent is not going to abandon the unification project that has given Europe stability, prosperity and wealth for the past 60 years.
The euro is the final step in the messy project of unifying a continent whose countries for centuries have been at war with each other. The EU has always been predicated on one simple idea: You don’t kill your neighbour if they supply you with vital goods, and vice versa. Hence a common market, and ultimately, a common currency.
Another driving force for European unification has come from painful historic experience: disenfranchised, impoverished masses provide a fertile breeding ground for extremism – fascism or communism, take your pick. From these hard lessons comes a firm conviction in the welfare-state model that now dominates the continent.
The tension has always been to align these two critical political objectives with the economic realities. Helmut Kohl, a former German leader and key architect of the euro, once said he wouldn’t even try to explain the evolution of the common currency in an economics class; the discussion is best left for a history seminar.
This historic dominance of the euro’s political agenda over the economic imperative has become the struggling system’s Achilles heel, reflected in the mess Europe is in right now. Greece’s welfare state – six weeks of paid vacation and retiring at age 55 – was overblown by most countries’ standards.
And yet if France and Germany can give Greece one cheque after another to bail it out, there is no reason they can’t solve the problem once and for all. Instead, Nicolas Sarkozy and Angela Merkel have chosen to allow the Greek problem to fester and deteriorate, bringing the situation to a make-or-break cliffhanger. That Italy is inching closer to the brink nicely adds to the havoc.
We can all ignore the theatrics now taking place in Greece and Italy. The current spectacle has been orchestrated as Germany and France rush in to exploit a rare political opportunity to demonstrate why sovereignty over fiscal policy cannot be left to member states, if you try to have a common currency. Bringing in the International Monetary Fund and its new head, Christine Lagarde, at the last G20 further increases the pressure for a single fiscal regulator.
No currency can reasonably survive if it’s not governed by one binding set of fiscal policies, and the euro has too many national governments with competing interests vying for influence here. Europe needs a single “ministry” to govern its fiscal policy, not 17 bickering neighbours.
Of course, the smaller members of the euro zone dread the idea of a budget commissioner in Brussels who would dictate the terms and scope of their national budgets. They would dislike the concept even more if that policy were to be dominated by Germany and France, with EU influence mainly based on population size.
In good economic times, there was no way that European countries were going to agree on a common fiscal regime. However, with every crisis also comes opportunity, and so now euro zone members are facing a shotgun marriage of sorts. Either face the breakup of their currency, with all its dire consequences, or defer fiscal sovereignty to Brussels.
Europe will finally get where it needs to go. The stakes for all players are too high and too closely aligned. The price of shared wealth on the side of the larger members and the deferring of sovereignty for the smaller members will hurt – but ultimately will be deemed the lesser evil.
My stakes are on Angela Merkel, a 21st-century master of Machiavellian politics, to turn this crisis into the golden opportunity it presents. She is someone for politicians and business leaders around the world, including Canada, to reckon with. We might not like the prospect of a “united states” of Europe, but it will be a reality that we should embrace, rather sooner than later.
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