Once again, the ECB stands at a crossroads. Inflation in the eurozone has risen to a 13-year high, and it is difficult for the ECB, with price stability as its sole objective, to turn a blind eye to such high inflation. On the other hand, for countries such as Greece and Italy, if the ECB raises interest rates, it will make its huge debt level worse, and even the trigger for the crisis.
The Bundesbank governor recently said that acting too late on monetary policy normalization could come at a particularly high price; the Bank of France seemed less worried, saying investors could overreact to the ECB's monetary policy shift. The ideas of different countries are colliding with each other.
The euro, the unified currency, seems to be at risk of tearing Europe apart.
At the beginning of its birth, the euro was placed great hopes, although it may not be able to reach the level comparable to the US dollar, but at least it can have a certain impact on the international monetary pattern and change the situation in which the US dollar is dominant. But after more than 20 years of practice, we have found that the euro is not as strong as some people expected, and even faltered in some periods, let alone challenged the international status of the dollar. According to data released by the International Monetary Fund (IMF), as of the end of the third quarter of 2021, the euro accounted for 20.5% of the world's labeled currency reserves, compared with 59.15% of the US dollar. Although the proportion of international reserves of the US dollar has declined, the share lost by the US dollar has been obtained by other currencies such as the renminbi, and the euro is difficult to say brilliant.
The euro is looked at from an international perspective, and from the perspective of the eurozone, the euro is also controversial. The most important problem is that the implementation of the same monetary policy among eurozone countries with very different levels of economic development, the position of the economic cycle, and the structural structure of the economy will inevitably produce round-cut results. The same monetary policy may be slightly loose for some economies with stronger economic developments, but for economies in recession, it is too tight, and monetary policy contradictions cannot be reconciled. In fact, for the economies that have joined the euro area, it is equivalent to abandoning the opportunity to use monetary policy to regulate the economy. At the same time, after abandoning the national currency, it is impossible to promote exports through the depreciation of the exchange rate, and the buffering effect of the exchange rate is completely lost.
After the loss of monetary policy independence, economies have only one tool of fiscal policy, but in order to prevent the adverse consequences of irresponsible fiscal policy, the Stability and Growth Pact adopted in June 1997 set relevant indicators such as the proportion of government debt to GDP (not more than 60%) and the fiscal deficit rate (not more than 3% of GDP in the current year) for the economies that joined the euro area, limiting the operational space of fiscal policy, which is actually to tie the hand of fiscal policy. Monetary policy in the eurozone is uniform, and fiscal policy in economies is severely restricted, leaving only the so-called "structural reforms" left for struggling economies, the results of which are often painful and even tragic.
In his new book, The European Tragedy, Princeton University professor and former acting director of the International Monetary Fund's Research and Europe Department, Argues that the euro itself is a tragedy, and it is a tragedy for Europe, and that the euro is both an economic tragedy and a political tragedy. Contrary to the original intention of the euro, the euro is not only difficult to integrate Europe, but if some of the problems generated by the euro continue to worsen, it will even tear Europe apart.
The emergence of the euro has both considerations to promote European economic integration and vision for political integration, and even hides the selfish genes of some countries. Proponents argue that the absence of exchange rate risk between countries joining the eurozone will facilitate trade and investment among member states, while membership in the eurozone will impose restrictions on government behavior, avoid excessive leverage, and contribute to the economic growth of member states. Paradoxically, the process by which the euro came into being seems to run counter to the evolution of the international exchange rate system. At the end of the 1960s, the realization of European monetary integration was on the agenda, but at that time, the Bretton Woods monetary system was coming to an end, moving towards a floating exchange rate system, and the fixed exchange rate system was already unsustainable. Even so, European economies are still looking forward to returning to the fixed exchange rate system, and the snake float and the European exchange rate mechanism are all fixed exchange rate practices, but they all end in failure. However, this did not dampen Europe's obsession with pushing for a unified currency, and the euro still broke its cocoon in early 1999.
For the euro, the global financial crisis was a watershed. Before the 2007-2009 global financial crisis, due to the better world economic situation, the economies of the euro area achieved a high tide, and the birth defects of the euro were not prominently manifested. After the global financial crisis, due to the deteriorating economic and financial situation of greece, Ireland, Spain, Portugal and Italy, the so-called Five European Pig Countries (PIIGS), it is urgent to ease monetary policy and provide fiscal stimulus, but the ECB is limited to the only goal of price stability, and has been slow to act, and the fiscal policies of various economies are difficult to make a difference due to deficit rate requirements and leverage ratio requirements. Greece, in particular, has a sluggish economy and a large debt, and defaults seem to be on the string. At that time, the shortcomings of the euro were revealed, neither because of the flexible monetary policy, but also because the sense of sovereignty of the nation-states could not effectively bail out the five European pigs. When the technology is poor, we can only hope that the troubled country will promote structural reform policies, but structural reform is not the right medicine, and sometimes it is even poisonous as arsenic, and the result must be miserable.
It is necessary to introduce the basic situation of the ECB here. Because the same monetary policy is implemented in multiple economies, in order to avoid interference, the ECB has a greater independence at the beginning of its establishment, and at the request of Germany, it will maintain price stability as its only goal, and stimulating the economy is not its legal goal, so the ECB has a special paranoia about inflation. Even after the global financial crisis, when the Fed has implemented a substantially loose monetary policy, the ECB has focused on price stability.
From the perspective of the countries that have joined the eurozone, the original intention of using the euro is to achieve better integration, but the frequent crises in some countries are in danger of tearing Europe apart. It is undeniable that the euro has not eliminated national and sovereignty consciousness, and that political pressure rises sharply when some economies need bailouts from others and need to spend taxpayers' money, and there is a strong opposition from the people who may fund the bailouts, and even the voices that pull the troubled countries out of the eurozone. But exiting the eurozone is not a better option, and if one economy withdraws from the eurozone because of its difficulties, then other similar economies will inevitably withdraw from the eurozone under the vote of investors' feet, and the eurozone will disintegrate. Achieving some form of fiscal union in the eurozone also faces significant obstacles, similar to germany, Finland and other countries that are strongly opposed to financial funds to support some economically and financially troubled countries.
In addition, there are serious conceptual differences in the eurozone. For example, Marcus Brennermel and Jean-Pierre Landeau's book The Clash of Ideas for the Euro explores the differences in ideas between France and Germany on governing the economy, with France tending to use policy to intervene in the economy and Germany favoring a free-market economy, which also affects the discussion of fiscal policy and the ECB's monetary policy in various economies. For example, in the aftermath of the global financial crisis, German Finance Minister Steinbrück pointed out that "the turn to stupid Keynesianism leaves people speechless." Steinbrück and most Germans believe that the idea of pulling the economy out of recession through increased public spending and tax cuts is fanciful. They believe that fiscal stimulus can only push up deficits and debt. They argue that the best approach is to further fiscal austerity, which would be tantamount to showing the people that the government will not raise taxes to pay off debts in the future, thereby raising people's confidence and prompting people to consume more.
As an international euro, due to the non-sovereign currency, the lack of risk-free high-quality assets such as US Treasuries for investors to invest in, to a certain extent, limits the level of international reserves of the euro. Some studies and policy recommendations point to the use of certain reputable institutions in the euro area to issue bonds and provide safe assets for international investors to invest in, thereby enhancing the international role of the euro.
At the end of His Book Tragedy in Europe, Modi argues that the euro violates the principles of economics and logically does not do any good for politics or economics, but rather causes great damage. Whether and how the euro tragedy ends will depend on the decisions of Europe's leaders. If you go down the road now, it will be full of mud. Obstacles to national sovereignty cannot be overcome, national consciousness cannot be ignored, and ideas are in conflict.
The success or failure of the euro seems to be an economic problem, but in depth, it is a political problem. For now, at least, the euro's prospects are not bright if the problems of politics and the nation-state cannot be solved. As the development gap between eurozone countries gradually widens, the coherence of monetary policy in the euro area will create increasingly serious problems, and it will be more difficult to reach fiscal unions and effective rescue mechanisms. Problems that arise within some countries (such as widening the gap between rich and poor) will shift to the euro, and although the euro is not the root cause, the resulting political polarization is also an important opposition to the euro. All in all, if some of the problems arising from the euro are not effectively resolved, the euro will indeed become a tragedy, and it will also become a tragedy of European integration.
This article is based on understanding the economy