The election results in France and Greece have returned the euro crisis to the front pages. Carefully crafted agreements on strengthening the fiscal rules in the euro zone and on rescuing Greece’s public finances are back on the agenda, no matter what Chancellor Merkel says. It is time to consider a civilized divorce of an ill conceived monetary marriage.
The European Union created an internal market for goods without causing too many ripples on the pond. Several landmark rulings made by the European Court of Justice (ECJ) helped to interpret what the Treaty of Rome actually entailed and, remarkably, the EU member states accepted and adhered to these interpretations. How different is the story of the creation of a single currency area. In 2003, when France and Germany for the first time violated the Stability and Growth Pact (SGP) that describes budget rules for the euro countries, the Council of Ministers (of Finance) decided to postpone judgment. Although the ECJ rejected the notion of abeyance as it was not part of the SGP, it upheld the right of the Council not to penalize countries for violating the terms of the SGP. This placed the creation of the monetary union firmly back into the realm of politics.
The contention focused on the 3% deficit rule, which makes for easy accounting, but does not always make good economic sense as restricting budget deficits deprives countries of an important (Keynesian) macro economic policy tool. And sometimes it is just impossible to achieve. The euro zone is testimony to all positions. Germany is the chief advocate for the strict application of the rule, France traditionally prefers more policy discretion, whilst for Greece and Spain the 3 % deficit is a far cry.
Is there a way to reach a compromise despite these differences? The European Commission follows the German lead, but even if it succeeds in winning this argument, it needs to develop a contingency plan in case a crisis does actually occur. And it will. More importantly, winning the argument only addresses half of the problem. The euro crisis is a banking crisis as much as it is a sovereign crisis. Many European banks have very bad balance sheets and the links between banks and sovereigns are plentiful. A compromise on fiscal rules, therefore, is insufficient without a rescue service and without provisions to deal with private sector, i.e. banking, problems.
This requires, among others measures, a fundamental rethink of the position of the European Central Bank (ECB), thus allowing it to come to the rescue of both countries and banks (which is actually already implicitly does) and to assume the role of bank regulator from current national central banks. It is unlikely that the euro zone countries would be willing to discuss an alternative mandate for the ECB.
The euro crisis is not going to go away. It drains mental and monetary resources and jeopardizes the project of European integration more than it contributes to it. Therefore, it may be wise to undo the monetary union and focus on further developing its internal market.