Whilst reading commentary on the implications of the Euro elections and the procedural tensions over the selection of the next European Commission president between the EU parliament and Europe’s finance ministers, I came across a thought provoking article – “Whither the Euro”- from a March IMF publication by Oxford Professor Kevin O’Rourke.
O’Rourke points out that the preventative policies necessary to avoid another Euro crisis – first a banking union, then a single resolution framework, followed by a euro area fiscal backstop, and (maybe) a common deposit insurance framework – require a deepening of European integration or “more Europe”. Although progress has been made on banking union, the “show me the money” commitment required for the next steps of integration has not been forthcoming so far. Nichola Veron, in another IMF article entitled “Tectonic Shift”, describes banking union as “a regime change for European finance” and says that whilst “prospects for the first step (of banking union) are reasonably encouraging, it will be a long time before the implications for Europe’s financial stability and economic prospects can be comprehensively assessed”.
O’Rourke highlights the reality today and the choice facing Europe:
“Europe is now defined by the constraints it imposes on governments, not by the possibilities it affords them to improve the lives of their people. This is politically unsustainable. There are two solutions: jump forward to a federal political Europe, on whose stage left and right can compete on equal terms, or return to a European Union without a single currency and let individual countries decide for themselves.”
O’Rourke asks at what stage the European wide political resolve to jump forward will emerge, having failed to materially progress 5 years after the crisis. The election results which just emerged across Europe suggest that the electorate has little appetite for “more Europe” and that there is a real disconnect with policy makers.
I must admit that since the Draghi put dispersed the prospect of a Euro breakup, I haven’t given much thought to revisiting the messy consequences. The fantasy spreads of many European sovereign bonds, as highlighted in a previous post, do suggest that markets are currently being over-optimistic on the future monetary stability of the region. With the prospect of future uncertainty due from increasing electorate discontent across Europe and due to events such as the unresolved structural faults in many economies and the likely exit of the UK from the EU in a referendum due by the end of 2017, a logical prediction may be that we will revisit the whole subject of the Euro again in the years to come.