Get serious with the euro

It is very clear today how temporary and ineffective the decisions made several months ago were. The point is not whether the funds assigned for saving the crisis-stricken economies were sufficient or not but, above all, that those decisions only delayed problems in time instead of solving them.

The so called peripheral eurozone states have structural problems and, consequently, their economies are not competitive. This is accompanied by massive sovereign debt, which, from today’s perspective, is unlikely to be ever repaid in full. Postponing reforms or pretending they are not really necessary has only exacerbated the problem. The key issue, however, is the lack of strategy.

It’s become clear today that the eurozone states haven’t worked out and discussed a strategy for pulling a member state out of a liquidity crisis. As long as the problem concerns a small peripheral economy, the other member states are able relatively quickly to shell out enough money to cover that country’s financial needs for the next couple of years. But if it’s a larger economy that finds itself in trouble, the funds the healthier member states have at their disposal may prove insufficient.

ECB’s job is not to rescue indebted countries

It is clear today that no one has seriously analysed the scenario. The idea for that troubled economies’ debts should be picked up by the European Central Bank could have been justified as an emergency solution several months ago but by no means can it be regarded as a systemic solution. Above all, because the ECB’s job is not to rescue indebted countries but to protect the stability of the common currency. Although the ECB stresses that it does remove surplus money supply from the market or, in economic jargon, “sterilises” it, the very fact that the ECB has other goals than price stability undermines its credibility. And it is on the basis of credibility, or lack of it, that consumers build their inflationary expectations.

Another serious issue is the lack of a clear decision-making at the centre of the EU. Three such power centres exist: Commission president Barroso, Council president Von Rompuy, and the Merkel-Sarkozy “super-duo”. The former two, trying to work out a cohesive solution for all member states, suddenly found out that everything had been decided for them at a Merkel-Sarkozy summit. This would have been less of a problem had their proposals been in line. Alas, they are a compromise between two extreme approaches, the union of transfers and the union of self-sufficient states. Such compromises seldom lead to sensible solutions.

Germany that has benefited the most from the euro

The fear of the possible break-up of the eurozone can ultimately help in finding a reasonable way out of the malaise. The financial markets no longer believe European politicians. They no longer react to the launch of the successive rescue packages. In fact, Berlin is opposed to raising further funds for bailing out Spain. Today the European leaders have to make decisions about delaying the repayment of the debt run up by the troubled member states.

The prospect of the eurozone’s collapse causes fear not only in the peripheral countries but in the zone’s largest economies as well. It is they that have in fact benefited most from the introduction of the common currency. Thanks to the euro, Germany within ten years became the world’s largest exporter. Over 40 percent of its exports go to other eurozone countries. If the euro were put to rest and national currencies were reintroduced today, it would be the D-mark that would appreciate the most. Germany would lose all its competitiveness whereas the crisis-stricken countries would regain it.

Paradoxically, it is Germany that has benefited the most from the euro and it should do everything to save the great European project. To achieve that, tough and decisive measures are needed, not rotten compromises that only postpone problems.