Why Europe’s monetary union faces its biggest crisis
By Wolfgang Schäuble
12 March 2010
Greece has reached a crossroads. For the first time, we in the eurozone are engaged in full surveillance over the fiscal and economic policy of one of the member countries of the European monetary union.
Greece’s case admonishes us to draw lessons for monetary union. My thoughts are in no way directed at the specific measures to stabilise Greece. Nor do they relate to discussions about the need for a form of economic government to provide improved co-ordination on economic policy throughout the European Union. My thinking focuses on making monetary union more resilient to a crisis.
The euro has shown itself to be a reliable anchor of stability in the crisis. It has protected us from intra-European currency turbulence that would otherwise have aggravated the situation in Europe. Nevertheless, we in the monetary union now face a decisive moment. The fallout from the crisis is becoming ever more visible, labour markets in some countries are languishing and government debt almost everywhere is far in excess of permissible deficit limits. There is only one course of action: all eurozone members must return to adherence to the stability and growth pact as rapidly as possible. I underline this message because I have the impression that global financial markets seem to be speaking far more plainly than many of the voices from the political sphere.
Grave structural weaknesses have been revealed in some euro area states - weaknesses that have to be addressed by a long, painful process of adjustment. Economic and fiscal policy surveillance in the eurozone was insufficient to prevent undesirable trends in a timely manner. We must therefore make more decisive use of the instruments available. From now on, a member state with an excessive deficit should not receive EU cohesion funds if it is not making sufficient savings.
It is obvious that the European body of regulations is still incomplete. Monetary union is unprepared for extremely severe situations of the type we are now seeing and that demand a comprehensive intervention to avert greater systemic risks. In the faith that budget surveillance was effective, the disequilibrium today was held to be inconceivable.
If we wish the euro to be strong and stable on a lasting basis - our condition for bringing the DM and its high credibility into the euro fold - we have to be prepared to integrate further in the eurozone. Co-ordination between euro members must be more far-reaching; they must take an active part in each other’s policymaking.
I understand that a great deal of political resistance will have to be surmounted. Nevertheless, I am convinced that from Germany’s perspective, European integration, monetary union and the euro are the only choice. What is decisive is Europeans’ ability to co-operate in partnership to deal with adversities. For the first time, it has become clear that a monetary union member with weak economic fundamentals can quickly lose the confidence of global financial markets in an acute budget crisis. This raises questions about how it would be possible to offer a member state support and simultaneously avert the threat of default when that country is consolidating its finances.
Traditionally these are tasks that the IMF has assumed in many crises, and it has produced strong results. For a member of the monetary union, this approach is not without problems because a central policy area, namely monetary policy, has been pooled. The involvement of the IMF is therefore being hotly debated. It is better for the eurozone member states to forearm themselves for such crises and augment their institutional framework. We could build on experience gained from use of the EU’s facility for medium-term financial aid to non-eurozone member states. In May 2009, the funding was topped up substantially on account of the considerable economic difficulties faced by some central and eastern European member states. This helped curb the consequences of a crisis.
Eurozone members could also be granted emergency liquidity aid from a “European monetary fund” to reduce the risk of defaults. Strict conditions and a prohibitive price tag must be attached so that aid is only drawn in the case of emergencies that present a threat to the financial stability of the whole euro area. This effect should be further reinforced by excluding the country concerned from the decision-making process - aid must be the last resort. Political decisions about aid should be taken in the Eurogroup in agreement with the ECB. Emergency aid could also be coupled on a mandatory basis with stricter sanctions within the framework of budget deficit proceedings. Monetary penalties could be imposed immediately and, once the aid and cooling-off period end, enforced against the member state without any recourse to reclaim the fine. The prospect of emergency aid connected with hard corrective fiscal action would boost the confidence of financial markets, thus preventing a deepening of the crisis and obviating the eurozone members’ need to call upon the IMF in future.
Emergency liquidity aid may never be taken for granted. It must, on principle, still be possible for a state to go bankrupt. Facing an unpleasant reality could be the better option in certain conditions. The monetary union and the euro are best protected if the eurozone remains credible and capable of taking action, even in difficult situations. This necessarily means suspending an unco-operative member state’s voting rights in the Eurogroup. A country whose finances are in disarray must not be allowed to participate in decisions regarding the finances of another euro member. Should a eurozone member ultimately find itself unable to consolidate its budgets or restore its competitiveness, this country should, as a last resort, exit the monetary union while being able to remain a member of the EU.
The voting rights of a eurozone member should furthermore be suspended for one year if infringement proceedings establish that this country intentionally breached European economic and monetary law. The true extent of the Greek budget disaster only became clear when the manipulated statistics were uncovered last autumn. I favour the EU statistical office Eurostat having the right to inspect all public accounts where suspicion of manipulation is substantiated.
Without doubt, it will take a great deal of political willpower to adapt the rules of monetary union speedily to suit the new realities. Yet there is no alternative to monetary union. There are some people who might feel that their scepticism towards the euro has been vindicated. They are overlooking the strengths of Europe and the problems faced in other leading global economic zones.
Greater calm is needed. The euro is the DM’s equal in terms of stability, there is little inflation and financing costs are generally low. The euro is now the second most important reserve and investment currency. A major reason is that financial markets have a great deal of trust in the ECB. To maintain this confidence, the crisis must be surmounted rapidly. This credibility is advantageous to the monetary union in overcoming the financial crisis. If we are successful in putting fiscal policies in the member states back on the right course, the crisis will have brought about a change for the better.
The writer is the German finance minister