Do you want to save the Euro? Well one idea for how to do it has been proposed by University of Missouri-St Louis history professor John Gillingham: reissuing the 12 national currencies that were replaced with just one, while at the same time retaining the euro as a parallel currency that finds its market value in competition to reissued national currencies (podcast here).
This would seem to have the advantage that you can still move round the eurozone and pay for your holidays in one currency while at the same time allowing national governments to run their own – appropriate, tailor made – economic policies. It would also seem, however, to have the rather substantial disadvantage is that it significantly resembles all those proposals for scrip money which were current in Argentina just before the final crash. It would also – depending on the details – seem to fall foul of what is known in the trade as Gresham’s Law: ie bad money will always and inevitably drive out good.
I propose in my book an idea that has considerable circulation within the City and which was at one point on the Treasury agenda in Britain. That is changing the euro, not destroying it, but changing its operating mechanism from being the sole currency in a single economic area to a parallel currency that finds its market value in competition to reissued national currencies. It does two things: first of all I believe that it is technically credible and sensible because it allows the currencies to adjust against one another on a daily basis. It eliminates the life of the major shock that the euro could still face once it becomes apparent that a currency that was designed for a political goal, that is to be a step towards a closer economic and political union has been organised for a country that will never exist.
Now what is interesting about this proposal isn’t the details, but the way it refelcts the fact that such ideas (that the euro isn’t working) are now becoming common currency among thinking economists. As Mathew Lynn points out
You can pick holes in the plan. Whether you really need to resurrect the Belgian franc from the history books is debatable. Spain and Portugal might want to get by with one currency, for example, as might Belgium, the Netherlands and Luxembourg.
Whether this particular proposal is the right one may not matter much in the end. What is important is that people recognize that the euro hasn’t worked as planned, and start talking about how to fix it.
There are only three ways forward. One is to struggle on with a permanently sluggish economy. Another is to wait for a financial crisis, or a bad-tempered exit (probably by Italy). The third is to preserve what is good about the euro, while repairing the parts that don’t work.
Wolfgang Munchau, who certainly isn’t associated with this proposal in any way shape or form, also has a piece in the FT today, and he does correctly identify the twin poles which make the balanced conduct of eurozone monetary policy virtually impossible: Germany’s growth crisis and the Spanish housing bubble:
The European Central Bank no longer keeps us guessing about the timing of its interest rate decisions. Jean-Claude Trichet, its president, last week gave a strong hint that the ECB’s governing board will raise the short-term interest rate on Thursday. The ECB has also encouraged markets to expect at least one further rate rise later this year.
But what then? In deciding the future course of monetary policy, European central bankers are confronted with two interesting questions: what to make of the German economic recovery, and whether to prick the housing bubble that has built up in some parts of the eurozone. As far as I can tell there is no broad consensus within the ECB’s governing council on either issue yet.
Listening to John Gillingham it isn’t clear to me that his agenda is exactly the same one the Open Europe group have. Gillingham’s view seems to be summarised in this exract:
The EU does some things well. For example by acting as a trade negotiator for all member states. Secondly by enforcing competition laws within the community which is essential to prevent a lapse into protectionism. To be able to enforce common rules and standards, not micro manage, and we saw a very destructive failure in this case with Botsteinâ€™s attempts to develop a financial services action plan.
Is there a common denominator of European nationhood? No it doesnâ€™t exist yet. The idea that you can stand people on a mountain and say â€œMozart belongs to all of usâ€- what it really means is that Mozart belongs to Brussels. God forbid!
This cultural identity of Europe is no place to begin. For example trying to define the European Social model. Is that the Italian social model or the Danish Social Model or something in between? It is very difficult to define this.
What will make the EU work is demonstrating over a long period of time say, ten years, the superiority of an open to a closed system. It will take that kind of thing to bring about change.
This does seem to be a valid point of view. Certainly we cannot abolish our national identities by pure fiat, their dismantling needs to be a process, and a comparatively long one. The big divide is between those who see the need to proceed with the demoltion works, and those who don’t. But even assuming that at some stage there was a consensus that they have to go we have to start somewhere, so why not now?. The real hot potatoe, and it gives us a connundrum that Gilllingham is obviously trying to address is ‘what to do with the euro in the meantime’?
The Open Europe collective, on the oether hand, seem more than happy to accept what we have, a Europe of Peoples. They seem to rule out the longer term project ‘tout court’. I myself question this whole ‘inviolability of peoples’ assumption, its adequacy and its validity in a globalised and rapidly changing world. Open Europe are however basically right in drawing the conclusion that a Europe based on nation state nationalism is incompatable with the euro. But once we arrive at this recognition there would seem to be two main alternatives which open up: abolish the nationalism, or abolish the euro. The choice gentle readers is yours. (Incidentally this recent thread and this one are highly relevant to interpreting what I am trying to say in this post. In particular since Gllingham is arguing explicitly for a weakening of the Commission, and I am arguing for its re-inforcement).