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EUROZONE/ Monetary Possibilities for a Post-Euro Europe

The Eurozone’s crisis is an opportunity for Europe to explore new monetary options that challenge the hitherto dominant vision of the European Union’s economic future, says Samuel Gregg

Photo Imagoeconomica Photo Imagoeconomica

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.