How to Fix the Euro Area Without Breaking It

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BLOOMBERG INTELLIGENCE JUNE 9, 2015

This analysis is by Bloomberg Intelligence Economist Maxime Sbaihi. It originally appeared on the Bloomberg Professional service. It consists of three sections. The first one looks at the roots of the crisis in the euro area. The second one examines progress and the remaining deficiencies as of today. The final section offers theory and practical solutions for the currency union’s future.

 

What’s Gone Wrong In The Euro Area

The euro area is five years into an existential crisis and no end is in sight. The roots lie in the mismatch between the initial political idea of a currency union and the means given to make it a working economic reality. The lack of organic, self-corrective mechanisms in the euro area’s structure has permitted the buildup of imbalances and thrown many members into their own deep crises.  In this first analysis of a three-part series, we look closer at what went wrong.

The Hope
The choice was made by a few intellectuals to begin laying the foundations of a monetary union, in the expectation that sharing a currency would prompt the economic and political union needed to support such an arrangement. Jean Monnet’s post-war strategy was summarized by Tommaso Padoa-Schioppa — one of the euro’s founding fathers — as a chain reaction “in which each step resolved a pre-existing contradiction and generated a new one that in turn required a further step forward.” Intellectuals persuaded national governments to participate in uniting Europe economically, one step at a time. Thus the European Exchange Rate Mechanism was born in 1979, with the promise made in 1986 to scale it up to a single market. The Maastricht Treaty was then signed in 1992 amid monetary turbulence that pushed the U.K. out of the currency agreement. The euro eventually came into being in 1999.

 

View full article on Bloomberg.com.

By Maxime Sbaihi
Photo: Hannelore Foerster (Bloomberg)

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