I was in Montreal this week to attend the Conférence de Montréal, where CIGI and the Asian Development Bank jointly sponsored a panel on food security (more on that in a subsequent post). The conference attracted a number of prominent speakers. Given the continuing turmoil in Europe, not unexpectedly, much of the discussion and interest focused on the analysis of and prospects for the euro zone.
To say the least, there was a range of views.
On the one hand, in widely-reported remarks, the former chairman of the Federal Reserve Board, Alan Greenspan, declared the euro experiment a "failure." Surveying the continuing disruption caused by the erosion of confidence, the impact of fiscal austerity on growth and the unrelenting weakening of the European banking system, Greenspan concluded that Europe faces an hour of decision. The only thing that can preserve the euro, he asserted, is full political union. That is a very tall order; indeed, even if there is the political will to go forward with the final element of the European project, it is unlikely that euro zone members could deliver on a timeline that would prevent further disruption.
That is the fundamental governance challenge to the single currency dream.
On the other hand, most senior Europeans in attendance were not prepared to concede defeat. Most vocal, most determined to defend the euro, was Jean Lemierre. A former senior French official, and past-President of the European Bank for Reconstruction and Development, Lemierre confidently pronounced the euro a "success." He asked conference participants to look beyond the current difficulties to a decade hence, when Europe will be the dynamic, prosperous currency area envisioned by the architects of the euro.
Given his professional pedigree, Lemierre could be considered one of those architects. As a result, some allowance can be made for his dogged defence of the euro. Lest there was a language problem, I was tempted to ask Lemierre for his definition of "success." But, as a wise friend is fond of saying (hat tip: JA), sometimes it is more important to ask "what can go right?", rather than "what can go wrong?"
In other words, might Lemierre have a point? If I understood him correctly, his argument rests on the discipline that the euro imposes on its members: that is, the need for the members of the euro zone to follow Germany's lead and improve their competitiveness through the euro-speak euphemism "internal devaluation." Lemierre made a point of pointing to Germany as evidence of the euro's success. I, too, admire the discipline exercised and the sacrifices made by Germany over the past two decades to integrate the former East Germany and contain public debt in advance of looming demographic challenges.
Yet, to extrapolate Germany's success to the euro and declare the European Monetary Union a success merits careful consideration. There is no question that policy frameworks in some countries (Greece, to be certain) could have benefited from greater "discipline" before the crisis. However, the case is less clear with respect to others – Ireland, for example. But to judge the euro a success on this basis strikes me as somewhat odd.
A better metric for judging the success of a monetary union is whether it helps its members achieve and sustain full employment and fosters the conditions for growth over the medium- and longer-term. Think of the first of these two criteria in terms of minimizing fluctuations around a trend line; the second as determining the slope of that trend. On this basis, the euro could possibly be judged both a success and a failure: it may have beneficial effects in terms of fostering long-term potential growth (raising trend growth from the “euro sclerosis” era rate); but it can hardly be judged as a success if it also results in persistent large gaps between actual output and full employment. That, I think, is the situation.
A successful monetary framework is one that facilitates timely, rapid adjustment to economic disturbances and thereby facilitates good economic performance. This felicitous effect reinforces the credibility, legitimacy and, thus, effectiveness of the monetary framework in promoting long-term growth. Under the euro zone status quo, however, adjustment in the periphery of Europe will have to come through internal devaluation – increasing unemployment to a level that forces workers to reduce nominal wage demands.
It is entirely possible that the strategy will work, as the architects of the euro hope. But the credibility and legitimacy of the euro is being sorely tested. The Greek elections on Sunday may prove decisive. The future of the euro could hang in the balance; it may be, as Wellington said of the Battle of Waterloo, “a close run thing.”