The euro is not a fundamentally bad idea. It just needs a timeout while some critical kinks are worked out.
Europe is at least two economies: a northern tier we might call Hanseatica and a southern one we will call Mediterranea. The Hanseatic economy is primarily commercial and industrial, and relies on exports. The Mediterranean economy remains more pastoral and agricultural, and relies on debt for its purchases of manufactured goods from the north.
The divide, rooted in topography, climate and culture, is diminishing, but is still in place. This simple distinction underwrites an imbalance ― one that the shared currency magnifies and worsens.
The euro is undervalued as a Hanseatic currency and overvalued as a Mediterranean one. Northern exports to the south are therefore unnaturally cheap, as are the charges on the credit extended to southerners who are buying the goods. Hanseatic credit balances build up in parallel with Mediterranean debt. In time, the southerners seem like deadbeats to northerners, while northerners look like neo-colonialists to the south. Resentments and acrimony ensue.
We have seen this before. Colonial North America was to London and south Britain much what Mediterranea is to Hanseatica today ― largely pre-industrial and dependent on the credit extended by the seller. Eventually, the Mason-Dixon line roughly split the U.S. in a manner not unlike the division in Europe today: an agricultural south and a more commercial, industrial north.
Today we find a like phenomenon in “Chimerica,” the de facto currency union that makes Chinese exports to the U.S., and American borrowing from China, unnaturally cheap ― with long- term consequences not unlike those seen in Europe.
The makings of an answer to the problem in Europe today can be found in the late 19th and early 20th century American experience. Three points are critical.
First, the U.S. did not really have a uniform currency until then. Second, once it adopted one ― administered by a single central bank, the Federal Reserve, as instituted in 1913 ― considerable local autonomy on credit and monetary policy remained in the form of distinct regional Fed banks, operating under board oversight, that were responsive to distinct regional market conditions.
Third, the U.S. steadily took on the attributes of a fiscal-transfer union in this period, with northern money flowing south via federal tax and spending policy. Residents of Mississippi, for example, still receive much more than one dollar back from the federal government for each dollar they pay in to the federal treasury.
What is the analogue for 21st century Europe? Take the three points in reverse order.
First, a would-be united Europe must ultimately assume the attributes of a transfer union. The Dutch, Finns and Germans will in effect have to send money down south at some point as New Yorkers and New Englanders do for Alabama and Arkansas, not simply lend it, if they are serious about having one economy. One day the funds might flow in a different direction, as with some southern U.S. states today. The point is that they ― funds, not merely credit ― have to flow. The union’s the thing.
Second, until such arrangements are worked out and put into place, the European Central Bank must operate a bit more like the U.S. Fed did during much of the 20th century and even to some extent today with its regionally federated structure. At a minimum, there should be a North ECB and South ECB, operating in concert and presumably under one board ― to manage two closely related, but still partly distinct, currencies.
The North and South ECB branches should likewise maintain partly distinct credit and monetary policies. And like the U.S. Fed regional banks, whose boards are partly made up of local economists, bankers and other business leaders, they must be managed partly by those most affected ― northern Europeans in the North ECB, southern Europeans in the South ECB.
Jointly managing the intra-euro exchange rate ― by adjusting the relative values of the two currencies in response to buildups of northern surpluses and southern debt ― will address the imbalances that caused much of Europe’s difficulty in the first place. Excess borrowing or inflationary policies in the south, for example, would devalue its currency relative to the north’s, making it harder to borrow and buy more imports. As for the north, an excessive reliance on exports to the south would yield a similar self-correcting effect: The appreciation of its currency would make its goods too expensive for Mediterranea to buy.
Finally, the paired currencies could bear names that reflect their temporary separation. Call them euro 1 and euro 2 ― or perhaps Hansa euro and Medi euro. The point is to preserve the north-south distinctions for the time being, while still showing to all that the two would at some point be once again joined.
One Europe is still the endgame. The two euro zones’ long- term unity and mutual devotion would survive ― and be better for ― a needed timeout. Work would immediately begin on the full fiscal and transfer union, and a good plan and firm commitment would counteract any panic effects that a strategic retreat might have.
It is said that the euro, like the European Union itself, is as much a political project as it is an economic one. If Europeans still think the political project is worthwhile, then it is worth showing some flexibility in repairing the still- developing economic substratum. The way to do that is with a federalized ECB and two euros.
By Robert Hockett
Robert Hockett is a professor of financial and monetary law at Cornell Law School and a fellow at the Century Foundation. The opinions expressed are his own. ― Ed.
(Bloomberg)
