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Exit the Euro ? A dangerous idea

The Eurozone, undergoing a test of fire is rocking Europe both financially and economically. The Economist Evariste Lefeuvre proposes to a large audience a dispassionate analysis of the single currency crisis to be viewed in a positive and completely neutral way

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More and more there are cries to exit the Eurozone, often presented as the best - if not only - solution to the present crisis. Proponents of this radical opinion refer, in particular, to the impossibility of the "Transfer Union", the politically unacceptable system of federalism and the absence of any inclination of the people and Parliaments to more solidarity. The efforts of the European authorities to save the single currency, being seen by many as an attempt to delay the inevitable failure: the break-up of the eurozone, its division ou the exit of one or many of its members. The Euro is dead! The Euro must go! It’s the Euro’s fault! This, rather than suffer any budgetary sacrifices that membership of a nonfunctioning Eurozone would require in order to regain its political and economic sovereignty. If, in such a way, these specialist or incomplete economic reasonings may hide bad electoral ambitions and populist whims, one must not mask the reality of the humain cost that the assistance plans bring.

The euro currency area has only a one-in-five chance of surviving in its current form

The euro currency area has only a one-in-five chance of surviving in its current form over the next 10 years because of competitive imbalances between its members, a leading British think tank said on Friday.

Excessive debt in a country which has no competition, complacent financial markets with doubtful public finances, uncontrolled cross-border banking, difficulty with application of budgetary rules, the single monetary policy, incapable of correcting divergent paths of the economy...it’s undeniable that the Eurozone and its single currency, target of all the attacks, has entered into a critical phase which sees its survival threatened. The excessive irresponsibility and budgetary flippancy of the States, together with the behaviour of individuals, banks in particular, are attacking from all sides a system which is hardly 10 years old.

Above all, the economic and financial crisis has shown an obvious lack in European leadership and vision for Europe where insufficient institutional framework and regulations is evident. Between short-term salvage plans ( put in place by the EFSF, European Financial Stability Fund) and attempts to overhaul the institutions (with day to day amendment of the principles that were once believed to be permanent), Europe is immersed in political crisis..

The problem is that financial and economic integration is not translated into a clear distinction between the Nation State and democratic control of the politics of redistribution ( which would have implied a European Federalism). The hybrid-type solution favouring the Nation State (and as a result, deeply impregnated with inter-governmental decision making) has, for two decades exactly, caused governments to lose a large part of their autonomy, thus highlighting the democratic deficiency of the EU. In addition, the creation of super national institutions which are based not only on the principle of subsidiarity but also on the economic effectiveness of the Eurozone, requires a centralised mechanism of governing which reduces the maneuver margin of the Nation State..

Consequently, national sovereignty comes back to the heart of the debate, imposing itself as a form of constraint on the maintenance of integration. If the economic model in question is not, of course "against" the people, such an organisation of governance makesdecisions more and more illegitimate. How under these circumstances could people not hope to get out of a Euro zone so far from being under their own control? According to Evariste LEFEUVRE, the social and economic result of such a choice - absolute economic , financial and political suicide - would be disastrous for the countries which implemented it. The Economic and Monetary Union, totally founded on a single currency represents a major step of european integration: to abandon it would signify the absolute disintegration of the European project put in place 50 years ago.

The economic pre-requisites of a well-functioning Euro zone will not be evident for a long time. The Euro needs more collaboration and co-operation in the supervision of political, economic and structural co-ordination as well as temporary but stable solidarity.

The debates on this subjects revolve around a number of key questions : Must one centralise more or, on the contrary, accentuate local autonomy? Must one strengthen rules or favour a more discretionary approach? Must there be more regulations or more power to the Markets: Must rules and penalties be automatically blind or subject to discretion? Must Solidarity be done uniquely through transfers or must it, on the contrary be limited by and subject to painful changes? Can the Euro survive the departure of one of its members ? - or economic adjustment plans that are socially intolerable? Can one reasonably believe in the future of the euro without stronger political integration? without correcting for the democratic deficiencies of Europe?

Shortcomings in the EMU - economic criteria and institutional foundations behind the EMU and differing opinions -, current crisis and immediate responses , the future and necessary reforms : Évariste LEFEUVRE makes the point that economic concepts, political interests and constitutional stakes which made the Euro, now questions intently the shelved problems in particular the ideological discussions, and presents the risks and advantages of different possible scenarios ( abandoning the euro, debt default, federalism) Greater accuracy on principles (stability), liabilities (solidarity), sacrifices (sovereignty), rules (governance, competitiveness) AND their implementation, (distribution of power and democracy)

Between economic efficiency (centralisation of governance) and popular political legitimacy of which federalism - the main vehicle of the European conscience and democratic control - is the principle guarantor, according to the author the survival of the Eurozone will get through as much by political engagement as by technical solutions. Such is the subject of this very pedagogical essay which relies upon essential elements of understanding.

Next Finance , September 2011

Article also available in : English EN | français FR

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