The Euro May Die, But Europe Will Live

November 10th, 2011 at 1:18 pm | 31 Comments |

| Print

A few hours after the prediction on this blog of a multi-track euro, the Germans and French went public with their desire to oust certain countries from the euro and build a new eurozone with much deeper policy integration and a much more selective membership.

Such a move gives the lie to several persistant and powerful myths of the European Union, but may well prove to be a very optimistic development for democracy in the new eurozone.

First, as also noted on this blog, the Franco-German team has now demonstrated that the Union treaties are just words to be disregarded in a crisis. Close watchers of the Union over the past several years can also confirm that they can be disregarded when there is not a crisis (see the Stability and Growth Pact). The ECB’s legal counsel has confirmed that there is no mechanism by which any country can be ejected from the euro, but that is exactly what Merkel and Sarkozy are planning.

This temptation to skirt fundamental rules is not new nor is it geographically limited to Europe. When John McCloy was the Assistant Secretary of War during WWII, he was considering the relocation of Japanese-Americans to internment camps. In 1942, he famously stated:

[I]f it is a question of safety of the country, [or] the Constitution of the United States, why the Constitution is just a scrap of paper to me.’

(Kai Bird, The Chairman, p. 146). The United States came to regret that view, just as the Union might particularly if its members lose faith in the durability of its institutions (especially when they are susceptible to arbitrary rewriting by the large continental powers).

If done in a way that prolongs the seeming solvency of the soon-to-be-untouchables in the current crisis, it may be possible to bribe undesirable euro countries to ask to leave the euro, for which there is a mechanism. That may be the only hope for Merkel and Sarkozy, and Germany seems willing to pay, presumably up to a point. Whether those countries want to accept their indirect expulsion from the eurozone, and at what cost, is a separate matter, as we have not yet been apprised of who’s out.

Second, the longstanding notion of the euro as the “currency of the European Union,” as stated in the Lisbon Treaty, is dead. Germany and France seem to be willing to scuttle the influence and controls they have developed in member states aspiring to the euro in order to make a better club for themselves and whoever else they deem fit to be in the euro. If you are a non-euro member state, and you haven’t got a call over the last three months or so, don’t hold your breath. You won’t be in the new euro.

Third, Sarkozy and Merkel have finally exploded the concept that the end of the euro is the end of the European Union. Also from yesterday’s Reuters report:

In Sarkozy’s vision, the euro zone would rapidly deepen its integration, including in sensitive areas such as corporate and personal taxation, while the remainder of the EU would be left as a “confederation”, possibly expanding from 27 to 35 in the coming decade, with enlargement to the Balkans and beyond.

In short, the end of the euro is not even the end of Union expansion. And, to eliminate doubt over what is being planned, when Sarkozy says we can still call the new euro the “euro,” he means the old one is gone.

Compare this to Merkel not six months ago, when she said to a Polish audience that if the euro fails, “then Europe and the idea of European union will fail.” This sentiment can now be seen as the simple scare tactic it always was, made more pitiable by the fact that their unwitting Polish audience will likely not be part of either the old or the new euro, despite its virtuous attempts to become so.

The most positive aspect by far though, is the end of the idea that further integration need not reference the desire of the people of the member states. What Merkel and Sarkozy are proposing is not a tweak or a “cleaning up exercise” of existing treaties. The new euro, in Sarkozy’s words, will seek integration (read regulation) of “corporate and personal taxation.” Member state governments ignore the political gravity of handing over direct taxation to a mini-Commission of eurozone powers at their peril. Those worthies that are chosen will then have to seek and secure their peoples’ consent to such an unprecedented arrangement.

And this is precisely the type of consent that is needed to effectively and democratically govern the Union. Not only would a new eurozone along those lines be much more efficient, it would be much more legitimate, and likely more accountable, as directly taxed citizens might pay more attention to what comes out of Brussels and Strasbourg.

That combination of efficiency and democratic legitimacy, even on this smaller scale, would satisfy a long-term stated goal of the Union. It may even lead to further reforms to Union structures to facilitate the separation of executive and legislative powers when they are now multifarious and overlapping and put some real limits on Union competencies where today few exist.

But for now, a currency with a treasury has always been what the euro needed to succeed. It will only be for a few and chosen by standards unknown if any. That explicit restriction will not come as a tonic to fans of deeper integration of the Union as a whole, but the possibility of greater democratic accountability, even in part of the Union, should appeal to all.

Recent Posts by Jeff Cimbalo

31 Comments so far ↓

  • D Furlano

    Let me ask is there a difference between wanting to leave or being thrown out from a severally disfucntional family?

    I guess being thrown out leaves little chance of ever wanting to return.

  • hisgirlfriday

    Hasn’t Merkel’s spokesperson gone back and denied everything Sarkozy said about the two-speed Europe and isn’t Merkel continuing to claim she wants to preserve the euro as is?

    Are Merkozy just playing out some calculated good cop-bad cop routine with the Eurozone because of the sensitivities involved around Germany being too pushy or dominant over the rest of Europe or is Sarkozy going further than Germany is willing to go because he’s scared about France’s precarious position with its Italian debt exposure while its AAA rating prevents ECB from helping them out? It seems Germany can afford to be less desperate than France and the EU itself is at the moment.

  • hisgirlfriday

    Oh and something else, I am not sure if I buy that a smaller eurozone will necessarily be more responsive to democratic concerns.

    This new tighter eurozone is likely to still be just as dominant over the lives and economic situations of everyone else in Europe but now the people outside that tighter eurozone won’t even get to pretend they have a say over things in Europe.

    And do the people of France and people of Germany and people of Belgium and people of Austria and people of the Netherlands actually want to all be linked together so tightly under proposals being pitched by politicians like Merkel and Sarkozy who may not be in office much longer themselves?

  • sweatyb

    If you’re going to kick someone out, I’d start with Germany. Yes, they’re the biggest fish, but they’re also the vampire in the lifeboat. Sure, they’re quite healthy, but that’s because they’ve been sucking the lifeblood out of the other members.

    Of course, you’d still need to allow the ECB to pay off member nation debts by printing Euros. But at least you wouldn’t have to make a deal with Merkel.

    • ottovbvs

      “If you’re going to kick someone out, I’d start with Germany. ”

      Yes that certainly sounds like a very intelligent idea.

    • Rich T Bikkies

      “Start with Germany”?

      Oh, yeah? How does that work? Just shout “Bog off, you Krauts” and they reply “Jawohl, meinen Damen und Herren”?

  • ottovbvs

    “A few hours after the prediction on this blog of a multi-track euro, the Germans and French went public with their desire to oust certain countries from the euro and build a new eurozone with much deeper policy integration and a much more selective membership.”

    Err..Leaving aside the highly speculative nature of this report (it’s already been both contradicted by the Germans and walked back by the French), if some of the weaker members of the Eurozone were ejected leaving only a smaller number of members of the zone it wouldn’t be a multi track Euro…would it? It would be just be a somewhat smaller club of Euro users. And wasn’t it only the other day that Cimbalo was claiming exit from the Euro meant automatic expulsion from the EU?

    The problem with this scenario from the point of view of Germany and the likely remaining stronger members and the expelled is:
    1) The new super Euro is going to be much stronger thus rendering all its users most of whom but particularly Germany are major exporters much less competitive. How many fewer of those Beamers are going to be sold in the US when the new exchange rate is 2 Euro’s to the dollar
    2)Those countries leaving the zone are going to face bank runs, the collapse of domestic banks, massive devaluations of their “new” currencies thus slashing the value of domestic assets and increasing import costs; and substantial increases in borrowing costs. In addition with currencies that are halved in value while the Super Euro is worth more the Greeks, Italians, Spanish et al aren’t going to be buying many of those Beamers either so a large part of German export markets are shut down! There’s also the problem that much of the private debt accumulated by companies in those being expelled is denominated in Euros and will have to be paid off in devalued new drachmas, pesetas, etc or these private business can forced into bankruptcy.

    Ergo while certainly not impossible there are a lot of bridges to be crossed before we get to this outcome. Basically Cimbalo is breaking out the Methode Champenois CA sparkling wine way too soon.

    • Sinan

      You are right. Krugmans blog this week has a great chart on exports within the Eurozone and debt ratios. But lets face it, mixing all those economies into one single currency was foolish in the first place. I personally would love to see Southern Europe become cheap again. My family lives in Spain and I am pretty sure they hate the euro, everything went up and they got very little in return.

      • Steve D

        “Much more selective membership.”

        The desire to be inclusive is noble, but when ill advised, can lead to chaos. Lots of things about the EU are positive, but maybe admission to the Eurozone should carry some heavy fiscal obligations. Maybe we could even add a third circle with many EU advantages but that would allow countries like Turkey to join.

        Yes, I know Turkey is Middle Eastern but they, or at least the progressive ones, seriously want to be seen as part of Europe. For God’s sake, get out your crayons and color them European on the map before we lose them. If we’d been able to do this with Iran, who knows?

        The archetype of premature inclusiveness is the UN. It was, admittedly, shackled by the need to include the Soviet Union, but just because a patch of ground has a border and a flag doesn’t make it a country.

      • ottovbvs

        “But lets face it, mixing all those economies into one single currency was foolish in the first place.”

        20/20 hindsight makes geniuses of us all doesn’t it? There’s still a line waiting to join. The fact is the Eurozone is a functioning entity that has brought benefits for north and south. Which is why all of them are anxious to preserve it. Cimbalo seems to think it’s either going to disappear or become a club with five or six members. Neither outcome seems likely to me although it’s conceivable two or three could leave but the costs to them as I’ve outlined above would be so horrendous that even that is only a remote possibility. Part of the price of fixing this is that there are going to have to be fiscal transfers and I suspect the Germans recognise this but they are not going to make it easy.

        • Traveler


          There were some good articles in the TE about the effect of the CDS clearinghouse raising Italy’s margin calls by 150% or (depending upon maturity), which immediately spiked the bonds above 7%, which is now unsustainable, so we have a death spiral of increasing costs. However, while debt to GDP is high, Italy could have covered the bonds when rates were the same as Germany, and most its bonds remain that low. So in essence, what we have is a classic run beginning already. Its a crisis of confidence, not necessarily cash flow.

          So I see German transfers already a done deal. The big problem with the EU, is that they have the will, and eventually the way, but they are forever chasing the market. Trichet should have been shot for his dithering. So it will remain together with a structure that should have been put together months, if not years ago, but at a much higher cost. And guess who makes out? Our friendly banksters….It never ends.

  • nhthinker

    Europe seems doomed by either choice.
    Continue to give failing countries more than they are willing to pay back or cut them out.

    Once they are cut out, the size of the markets for the stronger, smaller eurozone will erode relatively quickly… China, Russia, Asia and the US will drive their goods into the non-Euro portion of Europe. Then, the Eurozone will tank.

    The creation of the Euro was all about France and Germany having an advantage of selling their goods and services to the rest of Europe as compared to producers from the rest of the world.

    • dugfromthearth

      if New York and California can continue to subsidize Alaska and Montana and keep the U.S. afloat, Germany and France can keep Europe afloat.

      • Steve D

        Time to put this meme down. Much of the alleged excess of Federal funds to red states is Social Security (money paid in by the recipient) and pensions (money earned by the recipient). Now why, oh why, would people who earned what they are getting vote red?

        Let’s also not forget that Montana supplies a place for Californians to move when they have fouled their nest too much.

        • Traveler

          That so? Can you support that with facts? You mean they paid in while they were in blue states, and then moved to red states? I cannot wait to move to Alabama.

          Fascinating if true.

  • ottovbvs

    “The creation of the Euro was all about”

    Typical one dimensional view from our thinker. Actually it was PARTLY about ALL members of the Eurozone having an advantage versus the rest of the world when trading with each other but it was about a lot of other things as well like settling all accounts in one currency rather than 17; or giving the weaker members like Greece access to cheaper credit to fund internal economic development (it’s hardly the German’s fault they spent it on allowing bureaucrats to retire on 90% pensions at 50)

  • Graychin

    When it is announced that someone (Greece, perhaps) is going to be ejected from the Euro Zone, won’t that create a run on Greek banks? Won’t people be in a hurry to get their money out in hard Euros before having it converted to devalued Drachmas?

    I expect the Euro to remain where it is. Getting one or more nations out of the Euro is likely to create a lot more chaos than we have already seen.

  • Bingham

    So, the argument appears to be that a new (northern) Euro would go the way of the Yen and implode upon itself without a hinterland to throw itself into. Why does that have to be the answer? If I were controling the new Euro (or the Yen for that matter) I would invest heavily in emerging markets like India, Brazil, Indonesia, etc. Japan, of course, has done this in SE Asia for a long time now. Is that not a viable option for Frankfurt? If not, why not?

  • Demosthenes

    Paul Krugman’s most recent column notes that people are reading into the Euro crisis whatever pre-existing narrative they already had. I think it is evident after this slew of bizarre, data-free rants that Mr. Cimbalo’s opinions are derived first and foremost from some kind of ideological case against the EU and have only a minimal relationship with the reality of the situation, which in this case is that all he has to go on are unsubstantiated rumors from anonymous sources.

    Clearly there is a great deal of anxiety about the seemingly inevitable Greek default (which in some ways has already happened), the question now is how does the Eurozone deal with Greek default and what kind of measures does the EU take to ensure that neither Greece nor any Eurozone member state ever defaults again. The EU is not going to kick Greece out of the Eurozone. The question is what will Germany and France get in return for Eurobonds.

    • Bingham


      What is it with you and a Federal Europe, man? Seriously. Do you stand to lose money? Is that it?

      • Demosthenes

        I’ve already made my money (and my exit, for now) from the European markets. Banco Santander paid me great dividends for many years. And while I wouldn’t bet on a unified political system centered in Brussels quite yet, that is definitely the direction that the EEA and the EC are moving in. Pretending otherwise a la Cimbalo is just sticking your head in the ground. The bottom line is that the EU and the Euro have been extremely good for Europe, and that the Euro is still the #2 reserve currency in the world. Cimbalo tries to understand the EU through the lens of American history, then prognosticates based on his moralizing criticisms of European democracy, and fails spectacularly on both counts. I am only trying to set the record straight so that others may understand what Cimbalo obscures. Without commenting on or even taking a position about the moral dimensions of what it means to give up some degree of national sovereignty in exchange for economic benefits, it is clear that Europe is headed toward greater monetary and fiscal (and maybe eventually political) policy convergence. That is the trend since the end of the second World War and it will continue to be the trend for the foreseeable future.

        • Bingham

          Thanks for not answering my question in any meaningful way.

        • ottovbvs

          At least she’s provided some rationale which is more than be said for you with half baked questions. And broadly she’s correct about the general direction of affairs in Europe and absolutely correct about Cimbalo’s agenda which seems to be some odd mix of American nationalism and anti Europeanism. Many of the “anti democratic” tendencies he criticises in Europe are present in our own political system.

        • Traveler

          It might help if you posed a more coherent question perhaps. BTW, s(h)e did answer it, so whats with the flippant response?

          Ottovon, you are dead on the money about our so-called democracy. Let’s start with gerrymandering shall we? We could go on and on…..

  • MurrayAbraham

    Both are here to stay. The disappearance of the euro is just wishful thinking from Wall Street & The City.