Une chute de l’euro est invraisemblable (ENG)
Day after day, the design flaws of the euro are more and more cruelly exposed. History is confronting the Maastricht treaty signatories with their mistaken judgement that a currency can impose discipline on divergent economies when, on the contrary, a currency is more likely to lay bare an economy's strengths and weaknesses than cause them. The euro was founded on the naive assumption that factors of production, namely labour and capital, would adjust speedily and seamlessly after the launch of a new monetary standard. But persistent differences can be observed between a European North, with its healthy industries, well-controlled production costs and positive trade balances, and a European South suffering from a lack of competitiveness and its specialisation in non-exportable services.
This brings us to the theory of optimal currency areas of Canadian Nobel prize-winning economist, Robert Mundell. He championed the idea of optimal currency areas characterised by highly mobile factors of production, particularly labour. In practical terms this meant that, after a shock to one of the currency area’s participating countries, equilibrium would be restored through the mechanism of worker migration.
We observe nowadays that labour has remained largely national for reasons of language aptitude, cultural tradition, and educational and socio-economic context. It can even be claimed that low euro zone interest rates have fostered economic policy torpor in member countries because government debt, rarely visionary in nature, helps preserve the status quo. Most internal euro zone migration, meanwhile, is driven by economic survival rather than deliberate immigration choices. This is borne out by the Portuguese and Irish examples, which show young people emigrating mainly outside the euro zone rather than to the Northern European countries (Australia for the Irish and the former Portuguese colonies for the Portuguese). Research even shows less migration between European regions than from outside countries into the euro zone.
Labour is not the only thing to remain national. After the heady days of the financial boom and cross-border banking mergers, debt is again migrating to its country of origination. This is most noticeable in the resumption of public debt funding by the savers in debt issuing countries. For example, Italian public debt is funded by Italian banks and insurers. The resumption of domestically funded public debt reflects worries that systemic risk in the euro zone needs reducing. As risk never disappears but is only displaced, it has now gravitated to a number of fragile countries with low savings ratios. As we argue below, the resumption in domestic funding is undoubtedly the best safeguard against the break-up of the euro.
The euro crisis appears to be moderating after culminating in 2011. Still at very different levels, yield curves are nevertheless converging gradually. The public debt issuance capacity of the weaker countries is returning to normal. This positive change was brought about by the joint actions of the public authorities and the European Central Bank, which acted judiciously despite the unfortunate discipline imposed on it by German monetary policy.
Even though the euro has been temporarily stabilised, the underlying processes shaping the European economy are being subjected to conflicting pressures. The absence of economic growth and the clear signs of deflation are perhaps forerunners of major shocks. If Europe falls into deflation, it will retrospectively prove that a moderate dose of inflation should have been allowed instead of adherence to the European Central bank's official mandate. Deflation would, by the way, be catastrophic. It would add unemployment where there are no jobs. It would cause prices and investment to fall and raise the cost of household and government debt.
Asymmetry between euro zone countries has intensified. Alarming differences have emerged in the trade balances (gap between exports and imports) of member states. German growth is being driven by exports. Germany is consequently accumulating claims on the other euro zone countries. France meanwhile is registering a series of heavy trade deficits after significant deindustrialisation. Helped by German growth, Belgium's balance of trade is roughly in equilibrium.
Before the euro was launched in 1999 and adjustable exchange rates existed, exchange rate parities would adjust to restore equilibrium in the balance of trade. Trade surplus currencies would appreciate and trade deficit currencies depreciate. Germany thus revalued the mark many times, curbing its exports and stimulating imports. France and Belgium by contrast had to devalue their currencies to boost their exports at the cost of dearer imports.
Since the euro was launched, currency adjustments are no longer possible. Other mechanisms are needed to replace shifts in exchange rates. German domestic consumption needs to be boosted at the expense of the country's exports. Southern countries need to grow poorer to reduce imports and make their exports cheaper in a so-called internal devaluation. Of course, nothing ever goes to plan: German domestic consumption is inadequate, while Southern countries are collapsing under the burden of austerity. The advisability of an internal devaluation when the countries of the South specialise in… non-exportable services is itself questionable.
Meanwhile, the real economy continues to impact. The devaluations and revaluations which should have happened have accumulated to form a barrier preventing the economy's natural flows. The upshot is that, if national currencies still existed, the Deutsche Mark would be revalued by around 25% and the French Franc and Spanish Peseta devalued by 20%. These figures provide a measure of the problem's scale and guilt of politicians who imposed fiscal austerity on countries of the South already overburdened by a hard currency.
What will replace the devaluation that cannot be implemented in the Southern countries? It is likely to be public debt repudiation, i.e. arbitrary reductions in value or haircuts, on a par with what would be needed in a devaluation. It would not be too wrong to say that the public debt of Mediterranean countries could eventually require a haircut of around 20%. After all, currency and debt are two sides of the same coin.
Some voices recommend a return to national currencies and the abandonment of the euro. The idea is appealing but the consequences would be dramatic. Any weak country seceding from the currency would subject its foreign creditors to default and at the same time suffer a brutal devaluation. It would instantly be barred from the capital markets. Devaluation would fan the flames of imported inflation that could even lead to hyperinflation. Price and wage controls and other arbitrary measures, such as Argentina has experienced, would be needed to preserve social peace.
We should be under no illusion. The main advantage of returning to a national currency is to repay foreign creditors using a new, depreciated currency. The European Central Bank has made this less tempting through renewed domestic funding of public debt. Exiting the euro is less worthwhile when the majority of debt is held by national economic players who would be instantly impoverished. The probability of default on the public debt of some Mediterranean countries increases as a result. This is because countries of the South will be forced to make haircuts on public debt held mostly by its own citizens rather than secede from the currency.
So I believe scenarios of a euro breakup are premature, although they cannot be ruled out if they reflect the democratic will of the populations concerned. While the risk of currency implosion seems limited, existing structural imbalances represent a real danger. Furthermore, all of us feel history is accelerating and that we are living in peculiar times. All of us have understood that a lack of political will in Europe and growing differences between its economies and their massive public debt piles could trigger a cascade of unexpected events.
The euro has perhaps now become a political leap into the unknown in the face of widely divergent economies. No one could imagine the European countries founding a common currency based on present-day economic fundamentals. We are living in astonishing times when the euro is presented as a sacred goal just as its foundations are cracking.
