Ben Chu: Europe has to become a 'country' – a new beast – if the euro is to survive

US dollars, sterling and Japanese yen don't have the structural flaws that are undermining the single currency

Share
Related Topics

The Eurosceptic British right often refers to the eurozone as a burning building without any exits. Yet one of the most striking aspects of the present existential crisis for the single currency is how few Europeans actually seem to be looking for a way out, despite the turmoil. An Ipsos poll last week found that a majority of the populations of Germany, France, Italy and Spain would still keep the euro if they were asked to vote in a referendum tomorrow. A remarkable three-quarters of Greeks said they wanted to stay in the single currency, even after a majority of them voted for parties in elections earlier this month that rejected the terms of Greece's bailout.

It is a strange kind of burning building in which the inhabitants are apparently eager to stay amid the flames. So perhaps a better analogy for the present agonies of the eurozone would be to see the currency union as a cherished yet jerry-built structure that is tottering after being struck by a financial hurricane.

So what did the architects of the euro omit back in 1999? Why has the single currency proved so vulnerable in this global economic downturn?

There are four major structural flaws. First, strong currencies have strong central banks behind them. The US has the Federal Reserve; Britain has the Bank of England; Japan has the Bank of Japan. These are self-confident institutions that do whatever is necessary to stabilise their economies in times of great crisis, whether that means buying up large amounts of sovereign debt or slashing interest rates to support spending. The European Central Bank, however, is a pygmy in this company. The ECB's constitution puts strict limits on its ability to buy up the sovereign bonds of member states. Investors in US, UK and Japanese sovereign debt know they will get their money back because the central bank will, in extremis, print money and pay them off. Investors in Spanish and Italian debt can have no such confidence, which is why they are now desperately selling their holding of these bonds – something that is making it difficult for Madrid and Rome to fund their deficits.

Second, strong currency unions have comprehensive protections for bank depositors. The US and the UK both guarantee that bank customers will (within limits) get their savings back if a bank goes bust. This helps to prevent bank runs. But, Europe lacks this central deposit protection, which is why depositors are pulling their euro savings out of banks in weaker states and depositing them in stronger ones such as Germany. This deposit flight and attendant financial instability are heaping further economic misery on the weaker countries, pushing their economies deeper into recession.

Third, strong currency unions are backed by strong centralised governments. In the US, the majority of taxes are raised by the centre and spent by the centre. This means that if an American state is hit hard by an economic shock, it does not collapse because it automatically gets extra payments from the federal government for higher unemployment benefits. Spending on infrastructure and public services also continues to flow. But this doesn't happen in the eurozone. Instead, national governments raise all the taxes and spend them all, too. So when individual countries are hit particularly hard by an economic shock, such as a giant property bubble bursting, their tax revenues suddenly dry up and they face the prospect of bankruptcy. External support is on offer – as Greece, Ireland and Portugal have found – but it is not automatic. Rather, each bailout loan must be approved by neighbouring states. And neighbouring states, as we have seen with Germany, can be slow and begrudging in providing support, especially if they think the countries on the receiving end have been profligate.

Finally, strong currency unions are backed by strong national politics. Americans, Britons and Japanese elect national governments and those administrations take decisions with the welfare of the entire nation in mind. This is because they know they will be answerable to the entire nation at the next election. But Europeans don't elect a European government; rather they elect a German government, a Spanish government, a Greek government, etc. These politicians then, inevitably, go into negotiations with each other with their national interests, rather than the wider European interest, uppermost in their minds. This tends to result in lowest-common-denominator decisions which only serve to advertise the bloc's lack of political unity and alarm investors further.

The central design flaw in the eurozone, then, is that it is a currency without a country behind it. Can this half-built structure survive the violent storm? That is likely to depend on how rapidly it can develop the monetary institutions, fiscal transfer mechanisms and sense of common political purpose that define those currency unions that have stood the test of time. An ominous amount of work needs to be done in a tremendous hurry.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
iJobs Job Widget
iJobs General

Recruitment Genius: Games Developer - HTML5

£28000 - £45000 per annum: Recruitment Genius: With extensive experience and a...

Recruitment Genius: Personal Tax Senior

£26000 - £34000 per annum: Recruitment Genius: This is an opportunity to join ...

Recruitment Genius: Assistant Product Manager

Negotiable: Recruitment Genius: Due to on-going expansion, this leading provid...

Recruitment Genius: Shift Leaders - Front of House Staff - Full Time and Part Time

£6 - £8 per hour: Recruitment Genius: This is an opportunity to join a family ...

Day In a Page

Read Next
Jeremy Corbyn could be about to pull off a shock victory over the mainstream candidates Andy Burnham, Yvette Cooper and Liz Kendall   

Every club should be like Labour – you can’t join as a new member unless you’re already a member

Mark Steel
The biggest task facing Labour is to re-think the party's economic argument, and then engage in battle with George Osborne and his policies  

There's a mainstream alternative to George Osborne's economics

John Healey
A Very British Coup, part two: New novel in pipeline as Jeremy Corbyn's rise inspires sequel

A Very British Coup, part two

New novel in pipeline as Jeremy Corbyn's rise inspires sequel
Philae lander data show comets could have brought 'building blocks of life' to Earth

Philae lander data show comets could have brought 'building blocks of life' to Earth

Icy dust layer holds organic compounds similar to those found in living organisms
What turns someone into a conspiracy theorist? Study to look at why some are more 'receptive' to such theories

What turns someone into a conspiracy theorist?

Study to look at why some are more 'receptive' to such theories
Chinese web dissenters using coded language to dodge censorship filters and vent frustration at government

Are you a 50-center?

Decoding the Chinese web dissenters
The Beatles film Help, released 50 years ago, signalled the birth of the 'metrosexual' man

Help signalled birth of 'metrosexual' man

The Beatles' moptop haircuts and dandified fashion introduced a new style for the modern Englishman, says Martin King
Hollywood's new diet: Has LA stolen New York's crown as the ultimate foodie trend-setter?

Hollywood's new diet trends

Has LA stolen New York's crown as the ultimate foodie trend-setter?
6 best recipe files

6 best recipe files

Get organised like a Bake Off champion and put all your show-stopping recipes in one place
Ashes 2015: Steven Finn goes from being unselectable to simply unplayable

Finn goes from being unselectable to simply unplayable

Middlesex bowler claims Ashes hat-trick of Clarke, Voges and Marsh
Mullah Omar, creator of the Taliban, is dead... for the fourth time

Mullah Omar, creator of the Taliban, is dead... again

I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

Margaret Atwood on climate change

The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
New Dr Seuss manuscript discovered: What Pet Should I Get? goes on sale this week

New Dr Seuss manuscript discovered

What Pet Should I Get? goes on sale this week
Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

The cartoon hedgehog leading the way into a whole new reality

Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
Ants have unique ability to switch between individual and collective action, says study

Secrets of ants' teamwork revealed

The insects have an almost unique ability to switch between individual and collective action
Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

Donovan marks his 50th year in folk

The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
Let's Race simulator: Ultra-realistic technology recreates thrill of the Formula One circuit

Simulator recreates thrill of F1 circuit

Rory Buckeridge gets behind the wheel and explains how it works