The day after…the Euro

Note kindly translated by Anne-Marie de Grazia

The latest declarations or articles written in these past days by several European economists and politicians show that we have entered an acute phase in the Euro crisis. In Greece, the question of a possible return to the Drachma is being openly discussed. In Italy, Stefano Fassina, an economist of the Democratic Party (a left of center party from which Renzi emerged), who was deputy-minister for Economy and Finances in the Letta government, decided to cross the Rubicon on the Euro-question1. Fassina’s « conversion » to theses critical of the Euro shows well that the debate is taking momentum in Italy. More recently, Wolfgang Streeck, a sociologist and economist, published in Le Monde a long op-ed to indicate that Europe must abandon the single currency2. These various position-takings, without forgetting those of Podemos in Spain, are a good indicator of the fact that we have presently reached a breaking point. Streeck says in no uncertain terms, that maintaining the Euro is in the process of killing Europe and provoking a rise in anti-German antagonism.

This was foreseeable. But it leads one to asking a series of questions. For, if the awareness of the nefarious, deleterious and truly destructive effect of the Euro is becoming more and more widely shared, the sequence of events which will lead us out of this infernal machine is far from clear.

What sequence for the Euro crisis?

The first point which must be clarified concerns the conditions of a dislocation of the Eurozone. Shall we be confronted with a dislocation intervening in the aftermath of conflicts (between Greece and the Eurogroup, for instance) or following a series of unilateral decisions (one may think of Italy) or will this dislocation intervene following a common decision of the countries of the Eurozone? Very clearly, this latter hypothesis is theoretically the best. If the Eurozone is dissolved, or even merely « suspended » sine die (and we know that Brussels and other capitals delight in this kind of euphemisms), the countries would be in a better position to manage the process. Decisions on “target-zones” in the domain of exchange-rates could be adopted, creating a better foreseeability as far as the new parities are concerned. Agreements concerning banks would allow to limit the inevitable, but temporary, shock which the end of the Euro will generate. But we must acknowledge that the political discourse held by the various actors does not move in this direction.

Political stakes

The stakes of the existence of the Euro have become political, even though economic rationality should lead to dissolving it. There are several reasons for this. For Germany (and Mrs Merkel) the survival of the Euro is an important element in their economic strategy. Thanks to the Euro, Germany is preventing (and has prevented) the other countries from correcting their production gaps with its own economy, gaps originating either in differences in inflationary pressures, or in differences in gains in productivity.

Chart 1

Inflation rate within the Eurozone

Source : IMF data.

A - InflationEuro Source: IMF

Keeping the Euro guarantees for Germany the permanence of this situation. But on the other hand, Germany is not ready to pay what would be needed for the Euro to function as it should. The sums necessary have been estimated at between 8% and 12% of annual GDP over a period of between 5 to 10 years. This is clearly unbearable for the German economy. Which explains Germany’s intransigence about the existence of the Euro and about the politics of austerity, which is making sense only because it guarantees the existence of the Euro at the least cost to Germany. However, there is another reason for the German position. When Mrs Merkel says “If the Euro fails, Europe fails,” she is not merely defending the position of Germany. She is in fact expressing the fear of the German elites to be once more accused of “breaking up Europe,” as was the case in 1914 and in 1939. Against the brainless “experts” who forget the historic dimension in political positions, we must reaffirm the importance of history, and especially of the representations which it generates, in the formation of political attitudes. This position paralyses Germany, as is well shown by Wolfgang Streeck. It drives it to adopting an absolutely untenable attitude.

French responsibility

Yet, the fault is not all on one side. To Germany’s egotism, tinted with guilt, responds the Pollyannaism of the French elites who, wanting to be more European than Brussels, have abdicated all critical thinking, be it about the European construction or about the Euro. This is what drove the various French governments to align themselves, volens nolens, with the German positions. We must here evoke the myth of the “French-German” couple. Not that our two countries do not have good relations, which is fortunate and precious. But this “couple” has never existed but in the hazy brains of journalists and politicians in Parisian cenacles. It suffices to take the German look on things to realize that this “couple” doesn’t exist. But the main thing is that there results from the French policy towards Germany (or more precisely from its absence of policy) a discourse which can only reinforce German positions in their most detestable aspects.

These elements make presently the « best case » scenario, of an orderly dissolution, hardly probable. We must rather turn towards a conflictual dissolution.

The scenario of a conflictual break-up

The latter may be triggered by several events: the failure of current negotiations in Greece, a political change in Italy (intervening after the regional elections in the coming Spring), or a retreat of investors to « outside the Eurozone,» coming after strong concerns about the so-called « peripheral » countries, following a possible victory of Podemos in Spain at the beginning of Fall. Let’s note here that these various scenarii are not mutually exclusive. We will be confronted with a succession of crises entailing the exit, one after the other, of several countries. The question will arise of knowing at what point the French government will take the decision of leaving the Euro. Economically, it is clear that the exit of either Spain or Italy will make the exit of France from the Eurozone imperative. But in reality, this decision should be taken soonest if one wants the French economy to get out of it all the benefits possible. In the logic of a conflictual dissolution of the Eurozone, the rapidity of the sequence will be an important factor in France’s success in such an exit. We can measure this today with Greece, where nearly 12 billion Euros have left the banks during the month of February, gravely compromising the stability of the banking system. In the case of a conflictual dissolution process in the Eurozone, it will not be possible to consult the voters. One will have to act quickly, decisively, and probably by decree. The mandatory measures will be:

  1. Control of capitals (but not a control of currency exchanges).
  2. Re-taking control of the Banque de France under the direction of the Ministry of Finances.
  3. A provisory guardianship for the banking system in order to guarantee deposits and insure the continuity in payments.
  4. Measures of guarantee for the companies having borrowed abroad and not having at their disposal a flux of income generated abroad.

The question of the emission of new notes in « Franc » or « Euro-Franc » can be rapidly taken care of and is purely anecdotal in reality.

What European system « post-Euro »?

Many colleagues are now presently defending the idea of transforming the Euro from a “single currency” into a “common currency,” with each country finding back to its national currency but the Euro being maintained for material and financial transactions with the “rest of the world.” This idea is as interesting theoretically (and economically) as it is difficult to implement without major discontinuities. Moreover, it implies a “consensual” scenario which we mentioned above was very unlikely. Let’s say so upfront: this idea makes sense only as an intellectual transition point between adhesion to the single currency and recognition of its impossibility. But this does not mean that there will be no coordination between the European countries following a dissolution of the Eurozone, even a conflictual one.

The need of coordination

This coordination will first of all impose itself concerning the control of capitals, not only at the stage of its implementation but also during it progressive abandonment which can be considered within two or three years after the dissolution of the Eurozone. One will have to avoid both important and brutal exits as well as entries just as massive, the effects of which would be to destabilize the parities reached by the various currencies. Control of capitals appears as a key element in the policy of « target change » which will become one of the principles of the policies of the Central Bank in each country. But this control of capitals will be just as important in order to allow the Central Bank (in France, the Banque de France) to find back to a large autonomy in determining interest rates.

But this coordination will also impose itself, and rather quickly, concerning the aims of the exchange policy. Discussions will certainly be difficult but countries will have a common interest, once initial devaluations have been put into effect, in some measure of stabilization imposing itself. The main question will then be not to fall back into the same errors which prevailed at the time of the constitution of the Eurozone. One must leave a measure of flexibility to the various exchange rates, because the level of the structural inflation is different according to the countries, because the gains in productivity and the evolution of salaries will themselves be different, and finally because any one country could encounter an important “shock from out-of-the-blue” compelling it to an extraordinary depreciation of its currency. A relatively flexible system could be implemented. We will note that it will be the more stable the more the control of capitals will be maintained. One of the lessons of the speculative crises which occurred during the time of the European Monetary System in the 1990s is that a total freedom of capital is contradictory with a system of coordination.

With or without Germany ?

An important question will be to know if Germany will participate in this coordination. We know that German economists and politicians are fiercely opposed to the idea of a control of capitals. But they will be confronted with a massive influx of capitals to Germany (coming from the “rest of the world,” because the other countries of the ex-Eurozone will have, for their part, implemented a control of capitals). The risk is of a dizzying rise in the German currency, the exchange rate of which could reach 1.50 dollars, or even 1.80. The effect on the economy of such an increase in the value of the German currency will be the more important, the more the appreciation will be rapid. This is the reason which lets one think that Germany will be, whether it wants so or not, compelled to apply, like the other countries, a control of capitals. Once the decision taken, it will be much easier for the Germans to accept the idea of coordination, even a minima.

The legal framework

The important political question will be the one of the legal framework of such a coordination. We understand at once that a dissolution of the Euro modifies the conditions of the functioning of the European Union. It does not signify its dismantling, for a number of countries do not belong to the Eurozone. Of course, official discourse will need to be thoroughly amended, but that’s not the most important. What is essential is to know how this monetary coordination will be able to work: will it have to include only the countries of the former Eurozone, or part of them, or will it have to be extended to all the countries of the EU? In the same way, what will be its instruments and its procedures? Very clearly, there will be decisions taken as “multi-state”, be it in meetings of the heads of government or of ministers of finance. But this does not imply the dissolution of the European Central Bank. The latter will have to evolve, for sure. One can evoke here several possible paths. It could (and even it should) transform itself into a European Monetary Fund. But one can also think that it could take in charge an eventual “common currency” which could be created once the system of coordination is put in place and the parities of the European currencies are stabilized.

Towards a common currency?

For the idea of a currency assuring transactions between Europe and the rest of the world, for trading as well as for financial transactions, makes sense. Such a currency could exist only as “basket of currencies” of the countries which would accept being part of this system. This is the way that the Special Drawing Rights of the IMF are functioning and if the ECB were transformed into an EMF, it would be logical for it to endow itself with the same type of instrument. This “common currency” could serve as a reserve for the Central Banks of the European Union, but also at the international level. From this point of view, there is a true expectation in the so-called “emerging” countries for a currency which would be a real alternative to the dollar. The Euro has been able to fill this part only very imperfectly, because of the problems linked with its very conception. It has never gone beyond making up 26% of the reserves of the central banks and is presently in third place, behind the Dollar and the Yuan, as a currency for financial transactions. From this point of view, we must acknowledge the relative failure of the Euro in asserting itself as an international currency. A “common currency,” having gotten rid of the intrinsic problems of the Euro, could probably better assert itself.

Chart 2

Weight of the main currencies in the reserves of Central Banks

A - Extrait d’image

Source : IMF

Nevertheless, an important point – and one which could very well be a problem on the way to the creation of this « common currency » – will be the conditions of its management. From this point of view, a conflict is probable between conceiving of this currency according to the model of the DTS, and another, more ambitious conception which could take the Bancor of Keynes, proposed in 1944, as a model. The lack of a consensus on this point could turn out to be the main obstacle to the emergence of a “common currency” unless some in the European Union decide to ride it out alone. After all, it was the principle which was retained when the decision was taken to constitute the Euro…

  1. et []
  2. Streeck W., « L’Europe doit abandonner l’euro », Le Monde, mardi 3 mars 2015, p. 16. []


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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