Freeing yourself from the shackles of the euro… No one in the French political scene is seriously questioning France’s membership in the single currency, as evidenced by the presidential election that has just ended. Where does this silent reform of the single currency come from?
A matter of context one might think. The financial crisis of 2007-2008 is not of the same nature as the Covid crisis or the geopolitical crisis we are experiencing today. In an inflationary context, currency strength becomes an asset and limits the risk of a downward spiral as the exchange rate depreciation enters the loop, amplifying this phenomenon. When the strength of the euro, on the contrary, was an aggravating factor in the outbreak of deflation that followed sub-prime mortgages.
Yes, but the answer is a little short. It indicates that the euro will adjust to certain shocks and not others. According to this view, the mortgage crisis would have constituted a highly disproportionate shock, especially destabilizing the countries of the South, trapped in an overvalued and unfavorable exchange rate. In a way, the eurozone needed many parities to extricate itself from the financial crisis of 2007-2008. On the contrary, the shocks of Covid and the war in Ukraine will be symmetrical shocks affecting all economies without differentiation, which can therefore be settled under a common currency. But this is a biased version of the story. The subprime mortgage crisis is by no means more disproportionate than the ones that follow. The banking systems of creditor nations in northern Europe were particularly vulnerable to toxic American assets, particularly German banks. To speak of symmetric shock in relation to the health crisis is reverse reductive: it is to ignore European disparities in hospital capacity, with a corollary to the highly disparate rigors of confinement. The highly unequal budgetary space for maneuvering depending on the state to mitigate the crisis is also ignored, and disparities in specialization are downplayed, with the south heavily reliant on tourist revenue most affected by health restrictions… The same is true of the war in Ukraine, which exposes economies differently Exactly depending on its dependence on Russian gas, the intensity of trade and capital relations with Russia. All of these shocks, which failed to be able to adjust parity, are likely to deepen differences within Europe, particularly the North-South divide. And if the euro is seen as a solution and is no longer a problem, it is because its management has changed radically in nature.
In fact, the Euro in 2022 no longer had much relation to the Euro in 2007, namely Jean-Claude Trichet’s Euro. Unaffected by real imbalances, the Euro Mark has lived through its day. The euro in 2022 will no longer be the currency designed exclusively for the most competitive and financially strong European countries, to which other countries must adapt at the risk of withdrawal. This traditional surveillance currency, which exacerbated the wounds of skewed countries in terms of debt or unit cost, exposed its flaws in 2008. The sovereign debt crisis after 2010, which ended up threatening the integrity of the euro, was not just another crisis, but Rather, expose the imbalances of the European currency. Because it is an incomplete currency, it has created a divergence by adding budget and wage rigors to the more fragile economies of the Eurozone. And make no mistake, if the euro is managed today as it was under Jean-Claude Trichet, it will turn more recent shocks, whether from Covid or those of the war, into a divergent machine, in other words into an asymmetric shock.
What has changed since the end of 2011 with the arrival of Mario Draghi at the head of the European Central Bank and especially in August 2014 with the Jackson Hole announcement is:
Recognizing the necessary constructive link between monetary and budgetary policy to deal with crises. In the event of a serious crisis, it is not enough to provide liquidity or lower interest rates. An expansionary fiscal policy should take responsibility for the central bank’s efforts to support the real economy.
– It is a guarantee that the European Central Bank, through its purchasing policy (with unlimited holding caps per country since March 2020) has the antidote to limit spreads on the most vulnerable economies.
Then there is a new possibility for the European Union to provide community loans to finance tiered support schemes according to the needs of countries…. In short, the scheme of remittances, rebalancing even if a large part of these amounts is due for repayment by the beneficiary countries.
In short, the euro has earned its stripes as an active instrument of economic policy in Europe. He has a strategy against the Federal Reserve. They are no longer exposed to shocks, but rather absorb them. It seems that the time of double danger, when, in crises, it stifled European growth and exacerbated the symptoms of peripheral countries, when the appreciation of the euro brought its end to it.