On January 1, 1999, eleven countries would replace their respective currencies with one. The Euro became the single currency of 300 million Europeans, an unprecedented undertaking. Another unparalleled precedent: the very model of the Euro, a currency without a sovereign state. The common monetary policy is entrusted to a federal institution, but economic and fiscal policies are left to the discretion of the states. To meet this challenge of collective management, a common discipline was put in place with fiscal rules, a deficit of less than 3% of GDP and a public debt of less than 60% of GDP, to which all states committed to, in the Stability and Growth Pact.
Nine countries have joined the eleven founding members, and the Euro, the second most important currency in the global monetary system, has played a role in protecting and developing the European economy both internally and externally, and has withstood four major crises (2008, sovereign debt 2010-2012, Covid and inflation from 2021). But it did not bring all the expected benefits because some member states refused the required economic discipline. Worse, some states took advantage of the protection of the Euro to let deteriorating their public finances, thus weakening their productive apparatus, destroying their credibility and fueling the mistrust of their partners. These economic disparities emerged as soon as the Euro was created, with the countries of the North focusing on strengthening their industrial base and controlling public finances, while the countries of the South favored credit, consumption, and social redistribution without worrying about the budgetary consequences and inflation. These two “models” coexisted until reality took revenge and led to the sovereign debt crisis. As a result of this crisis, the countries of the South, with the notable exception of France, improved their fundamentals, greatly helped by the exceptionally accommodating and long policy of the ECB. While inflation reached levels never seen since the creation of the monetary union, the ECB continued this policy, creating adverse effects on productive investment, now zombie companies, dependent on productivity, creating speculative bubbles and promoting State indebtedness. The monetary Union is at a decisive turning point. But what to do?
The author first tells us what not to do. Structural problems cannot be solved by an increase in debt. We must stop easing the money creation, the monetization of debt is not the solution, there is no European magic money.
Budgetary discipline is essential, we must lower current spending, and revive productive investment. Reviving the European economy will require improving financing conditions, creating pension funds to drain savings into corporate equity to encourage innovation, revive securitization, and achieve a true banking Union. And finally, we must stop considering the violation of common budgetary rules by a number of states as an acceptable and credible solution.
Dider Cahen, PhD in Economics, is the General Delegate of Eurofi, a think tank that promotes the single market for banking and financial services in Europe.
Ph Alezard