Monetary Possibilities for a Post-Euro Europe

Despite the increasingly frantic attempts of governments and central banks to resolve the eurozone’s debt crisis, at no time in its history has the euro project seemed so close to collapse. Across the eurozone, national financial services’ watchdogs have warned private banks to develop contingency plans for several countries exiting the common currency. Banks themselves are outlining scenarios of the likely effects of European Union states returning to national currencies. In financial markets, the growth in bond yields offered by eurozone nations since October underscores investors’ doubts about the willingness—and even the capacity—of Europe’s political leaders to preserve the single currency.

For most of Europe’s political establishment, the eurozone’s shrinkage or implosion would represent a severe setback for their particular vision of European unification. Some government leaders, such as France’s Nicolas Sarkozy, are consequently pushing for massive bond-market intervention by the European Central Bank. Others, most notably Germany’s Angela Merkel, favor an approach with even farther-reaching implications: renegotiating the Treaty of European Unification so as to provide for common fiscal governance. That would necessitate a significant diminution of eurozone members’ sovereignty.

However, should the apparently unthinkable happen and the common currency as we know it come to an end, European governments will have a once-in-a-lifetime opportunity to rethink the type of monetary order they wish to embrace. But this would involve widening the range of political choices about Europe’s future they are willing to contemplate.

One such scenario is a three-way monetary division within the EU that reflects the differing political commitments and economic priorities of different nations. Germany and the more fiscally responsible eurozone members such as Austria, Finland, and the Netherlands could, for instance, decide to reconcile themselves to being the only ones with the necessary fiscal and monetary discipline to maintain a common currency.

Alongside this bloc would be two other groups. One would consist of those EU countries such as Britain, Sweden, and Denmark that have maintained their own monetary systems because of reservations about the euro’s implications for national sovereignty. Another group would include EU nations such as Greece, Portugal, and Italy that are simply unable or unwilling to embrace the disciplined monetary and fiscal policies required by a common currency; these nations would consequently find themselves outside the eurozone and reverting to their national currencies.

A more radical monetary opportunity for a post-euro EU would be currency competition. This was once proposed by Britain’s Margaret Thatcher as an alternative to the present common currency. Contemporary proposals for currency competition, such as that advanced by Philip Booth and Alberto Mingardi, involve the monetary authorities of different countries authorizing the use of currencies alongside the euro in domestic settings other than their own. Consumer choice rather than state sovereignty would thus ultimately determine which currencies were used.

Yet another option would be the embrace of what might be called a European gold standard. In the 1950s and 1960s, the German economist Wilhelm Röpke argued that European monetary integration could occur via a nucleus of countries agreeing to adhere to a gold standard, much as had happened somewhat spontaneously in the nineteenth century through a process of unilateral decision-making by individual countries. Once this had occurred, adherents of such a gold standard would have to insist upon all members maintaining monetary discipline as well as freedom and stability in foreign exchange markets. Countries unable to adhere to these rules would not be admitted to the European gold club. Those who failed to abide by the club’s rules would simply be expelled. There would be no “once-in, never-out” policy.

There are European precedents for this type of monetary union. In 1865, for example, Italy, Switzerland, Belgium, and France agreed to fix their currencies to particular weights of gold and silver, and to allow their currencies to be freely interchangeable. Other countries such as Romania, San Marino, Greece, Spain, and Serbia gradually joined this group to form what became known as the Latin Monetary Union (LMU). Over time, the LMU moved in the direction of a de facto gold standard as silver came to be used less and less. The LMU, like the international gold standard, eventually crumbled as a consequence of World War I, though it formally lasted until 1927. Greece, interestingly enough, was expelled from the LMU in 1908 for debasing the gold in its currency.

Needless to say, none of the monetary options outlined above is likely to gain much support from contemporary European politicians. Partly, this reflects awareness of each option’s particular drawbacks. There is no such thing as the perfect monetary system. The ability of gold standards, for instance, to function as regulative monetary mechanisms traditionally has been impaired by the slowness with which the gold supply adjusts to real changes in demand. In political terms, these options also demand a discipline from governments that will not necessarily help their reelection chances.

But a more important, long-term reason for political resistance to adopting any of these post-euro possibilities is that each would mean that the days of European politicians’ using the process of monetary and fiscal harmonization as a vehicle to cement continent-wide political integration from the top down would be over. That would, in turn, require significant rethinking of the very meaning and character of European integration.

Here we see how a lack of political imagination about the EU’s future on the part of much of Europe’s political class limits their economic imagination when it comes to Europe’s monetary possibilities. All of the present fiscal governance measures being proposed by government leaders such as Chancellor Merkel assume that the most appropriate response to the present monetary crisis is the centralization of fiscal policy.

In one sense, that is the correct response, if Europe’s leaders want a single monetary policy managed by a central bank for economies as different as Greece and Germany. This assumes, however, that Europe’s political and economic integration must involve the gradual centralization of monetary and fiscal policies managed by supranational European institutions that, by definition, diminish national sovereignty in the name of harmonization.

But why, one may ask, must this be the case? Certainly, there are good reasons for a gradual political and economic integration of European countries. It is easy to dismiss some European politicians’ insistence that a eurozone breakup would eventually lead to war as alarmist and as a way for convinced dirigistes to avoid giving substantial answers to critical questions about the EU’s direction. We should not forget, however, that the modern European nation-state’s development has not proven to be an unmitigated blessing. When mixed with forces such as fascism, nationalism, and communism, the nation-state has provided a potent means for oppression, not to mention violent aggression against other Europeans.

Yet achieving an integration of nation-states through gradually embracing a centralized supranational European state brings with it all the problems of political and economic centralization on a much larger scale, not least among which is the likelihood of a steady diminution of political and economic liberty. Not long before his death in 1966, Röpke maintained this would be the logical trajectory of any such European entity that directed a centralized monetary policy and sought to implement top-down fiscal governance.

But Röpke also took a dim view of such policies because he believed that the subsequent centralizing tendencies of Europe would have deeply detrimental effects upon the genuine pluralism represented by the vision of l‘Europe des patries—an idea, Röpke noted, articulated by modern Europeans ranging from Montesquieu to Charles de Gaulle. This alternative idea of Europe, Röpke maintained, translated into a federalism that emphasized market freedom and competition across borders, and that precluded any kind of centralized European economic planning precisely because top-down fiscal governance was incompatible with a highly decentralized form of political integration.

From this standpoint, most contemporary European leaders’ responses to the continent’s currency and fiscal problems underscore just how much they have lost sight of one of Europe’s great strengths: genuine pluralism amidst the many commonalities that have linked Europeans for centuries, since long before the Treaty of Rome was signed in 1957. Indeed, the present EU habit of hammering together policies at the top before occasionally submitting them (almost as an afterthought) for ratification by national parliaments or popular referenda helps to fuel dislike of the entire integration process, not to mention the legitimacy crisis that increasingly confronts Europe’s political classes.

There is, however, an alternative: that the process of European integration be primarily driven from the bottom up. Here the focus of integration would shift away from politics. Instead the emphasis would be individuals and businesses trading with, competing against, and investing in each other across borders. Governments would primarily limit themselves to removing barriers to the free flow of persons, capital, and trade between nations. One example of what such integration might look like is the European Free Trade Association (EFTA). Created in 1960, EFTA’s attention has always been upon liberalization of the movement of persons, goods, and capital between its member-states. It has never tried to impose fiscal, social, or monetary policies upon its members.

Of course, if the EU moved in such a direction, it would mean a much smaller role for European politicians and bureaucrats. It would also run contrary to their deeply ingrained dirigiste instincts. Nonetheless, it would allow for an escape from the pattern of one-size-fits-all approaches that tend to diminish the space for political and economic experimentation throughout today’s EU. In this respect, a willingness to explore post-euro monetary options that break away from the hitherto dominant European trend toward top-down centralization of monetary and fiscal policy would be a step in the right direction.