In a very perceptive article published in the Spectator of February 13th (1) Fredrik Erixon describes “The death of the center in European politics”. He rightly points out: “This is no longer a story about the rise of populists, it’s a story of change. Either the old parties must adapt or populists will — transforming into the new ruling norm.” This is a very crucial point because it shows that by restricting the debate challenging the “populist nationalist extremes” to waiving the spectre of the demons of the first half on the 20th. century  – a “historical” period that only few survivors recall – the “democratic centre” is addressing its audiences at cross purposes to their main daily preoccupations.

By refusing to deal squarely with the questions raised by immigration, rising inequality, globalization, demography (with all its implications in terms of life expectancy, health, the funding of pensions, etc.), most European centre parties are leaving it to extremists to offer solutions, obfuscating the often underlying autocratic regime that their implementation requires. The upsurge of nationalist-populist parties can also be attributed, as Philip Stephens writes in the FT(2), to the loss of public opinion’s trust in the political class, abetting the extremists’ appetite to gamble with radical change.

One of the main difficulties facing the centre parties is that many of the challenges require a solution at EU level (climate – immigration – defence – economic and monetary union – regulation and standards of the single market, etc.). As a result, the debate surrounding EU reform is becoming simultaneously more fraught and more necessary than ever: the forthcoming two year “Conference on the future of Europe” will be a watershed. If the EU is to survive, the conference has the obligation to yield concrete results in terms of deeper integration, for instance addressing the vexed questions of an autonomous EU fiscal capacity, the elimination of unanimous decision making and the sharing of sensitive elements of national sovereignty. With national-populist parties breathing down their necks, it will prove very difficult to combine support for these necessary bold reforms with the imperatives of holding on to power at home. In addition, powerful domestic interests in the political class and in the public service will fight bitterly to prevent their existing “powers” (and accompanying privileges) from being diluted in favour of the EU (for instance dispensing with an autonomous “foreign affairs” ministry).

Trying to walk the high wire between national and European politics, by focussing exclusively on demonizing the risks of nationalism rather than extolling the benefits of integration, can be compared to “project fear” that, in the end, did not prevent Brexit and is likely to lead similarly to the break-up of the EU. This overcautious approach to EU reform is neither desirable nor necessary: indeed, never have the positive arguments for deeper EU integration been so strong with the broad recognition that a growing number of policy areas can only be dealt with efficiently at EU level. In addition in a developing “multi-polar” world, dominated by a limited amount of superpowers, it should be clear that, unless it speaks with one voice, the EU will be ignored. Such decadence from the heights of uncontested world dominance in just over one century can, however, be halted and even reversed, allowing the EU to play a leading role in world affairs that its “combined” strength is capable of exerting.

Persuading public opinion of the undeniable advantages of a fully sovereign EU versus the “vassalization” of its 27 independent “sovereign in-name-only” Members needs a concerted explanatory effort. The current context in which to do so is far from negative: there is clear evidence of an underlying pervasive “gut feeling” that the € is considered to be a significant “public good” which is likely to be far more stable than 27 national currencies  – managed by often discredited national governments – would ever be. Such a mood was already apparent in forcing the National Front to abandon its “Frexit” policy during the 2017 French presidential election and, more recently, support for the EU was boosted by the uncertainties that continue to surround the consequences of Brexit.

When arguing for further European integration, it is necessary first to debunk a series of myths surrounding the € that cloud the issue and mislead the public. I will address three of these: inflation, austerity and reversibility and their respective role in assessing the single currency’s impressive success during its first 21 years of existence.

A first myth, that is cleverly exploited by the nationalists, is that “the introduction of the € has been responsible for accelerating inflation”. This is a lie as is clearly demonstrated by the manifestly unsuccessful efforts of the ECB’s monetary policy to stimulate inflation to reach its target of “below but close to 2% p.a.” since the financial crisis of 2008.

There can be no doubt whatsoever that the statistical data released by Eurostat is correct within the definition it has adopted for measuring inflation (even if it is fair to question the weighting, inclusion or exclusion of some of the parameters). An objective indication of the accuracy of the measurement is the interest rate environment which after a prolonged period of steep decline is now hovering in negative territory. Despite both conventional (rate cuts) and unconventional (QE-LTRO) measures, the ECB has been unable to meet its inflation objective, as each attempt to raise rates in order to return to a more traditional environment (and restore more flexibility to the ECB in the next economic cycle) has been offset by the fear of impairing economic recovery and resisted by Member States who enjoy the historically low cost of indebtedness.

It should also be emphasized that these complex technical explanations are not a satisfactory answer to the perceived far higher rate of inflation among large sections of the population. This is because of the nature of the statistical data whose parameters affect various segments of the population very differently: for lower income/wage earners, inflation affecting the proverbial “housewife’s basket” is significantly above the published official rate, as a far higher proportion of their expenditures is concentrated in recurring uncompressible expenses which tend to increase regularly (utilities, transport, services…) or fluctuate wildly (food, petrol…), while they rarely benefit from items that become cheaper (electronics, air travel, big ticket items…). This distortion is further exacerbated by the fact that lower income groups have seen the return from their (modest) savings accounts all but disappear or – not earning enough to pay taxes – have not benefitted from the tax cuts that higher earners have enjoyed. Conversely, richer people have disproportionately benefitted from the huge increase in asset prices, in particular equities and real estate, aggravating the feeling of growing inequality and social injustice that pervaded the Yellow Jacket movement in France. Finally, differences in perception of inflation also vary according to location: inhabitants of thriving metropolitan agglomerations enjoy the greater upward mobility opportunities available as opposed to the feeling of diminishing purchasing power and of being forgotten, prevailing in the countryside and small town populations.

Concluding, one can fully exonerate the € for having induced a higher rate of inflation than if the 19 tributary currencies had survived independently. Quite to the contrary, the (weakly) enforced discipline of the “Growth and Stability Pact” and the additional measures taken after the financial crisis have, if anything, given greater stability to the currency, avoiding otherwise harmful competitive devaluations and underpinning greater economic activity in the Single Market.

Turning now to “austerity” whose enforcement is also being blamed on the €, one tends to confuse the intrinsic characteristics of the Single Currency based on the strong fundamentals of the Eurozone, with the unfinished implementation of EMU, the nearly complete Monetary Union still being deprived of its Economic counterpart. This is the result of an initially flawed conception by which a common “regulatory” framework applicable to all Members would be a viable substitute for integration and thus preserve the cherished “national sovereignty” of Members over their respective fiscal and economic policies. This situation, in which the ECB finds itself facing 19 different national governments is totally dysfunctional and unique in world. In the long run it is unsustainable as it imposes a “one size fits all” policy (austerity for now) on a significantly disparate membership, many of which are today only paying lip service to their treaty obligations of economic convergence. It has also led to bizarre distortions in the day to day management of monetary policy where “formal” adherence to the principle of “equal treatment” has forced less than optimal interventions such as buying sovereign debt securities in proportion to the issuer’s equity in the ECB’s share capital!

Far from being a hindrance, a fully developed €, serving flexibly the 27 Member States (joining EMU is a treaty obligation), would constitute a very powerful tool for underpinning the global reach of the Union’s influence which is a major ambition of the new Commission. It would also allow the € to compete head on with the US Dollar to which it is currently beholden. This would entail endowing the EU with a “federal” government, sufficient “own resources” and a corresponding autonomous borrowing capacity, all very controversial topics which will appear as being among the most challenging facing the Conference on the future of Europe.

So, clearly, “austerity” cannot be blamed on the €. Instead it should be attributed to the inability of the Member States to fully develop the single currency’s potential!

Finally it is essential to kill the myth of the “reversibility” of EMU, suggesting a return to the original tributary national currencies by simply reversing the process. This widespread belief stems paradoxally from the initial success and smooth introduction of the €, result of years of meticulous preparation by the European Monetary Institute (forerunner of the ECB), the Commission and the Member States.

Returning to independent national currencies cannot be organized on the legal principle of the “continuity of contracts” which underpinned the introduction of the €. Indeed, on the 31.12.1998 the parities between the 10 participating currencies and the € (maintained during the two previous years within a tight range) were fixed once and for all (using their respective closing exchange rates with the USD as the common reference). These parities remain unchanged, and one can still exchange today old currency notes for €s at the Central Bank at the original rate. Accordingly any contract of whatever kind denominated in one of the tributary currencies could, from then on, be legally discharged in €s using the initial fixed parity. From that moment all participating members ceased to incur exchange rate risks between each other but were now subject to fluctuations of the € versus other currencies.

Reversing the scenario does not work because € denominated contracts of an equal amount would no longer have the same value as soon as the new national currencies in which they were converted, fluctuated relative to one and another: the contracting parties would no longer receive/pay the equivalent of the original specified € amount which would be tantamount to a breach of contract.

This feature would also apply to the servicing of outstanding sovereign debts. Any effort to impose by law an arbitrary exchange rate would be considered a “default” and would – if imposed – cut off any access of the issuer to international financial markets at the very moment when the “new” national markets would be unable to substitute for the now defunct “euro market”. The outcome would be the breakup of the EU and a series of competitive devaluations of the new currencies hurting – as usual – the more vulnerable segments of the population and reigniting (uncontrolled) inflation.

Should, nevertheless an attempt at an “orderly” breakup of the € be envisaged, it would have inescapable consequences: first and foremost, before any possible leak of such a decision could occur, it would be imperative to impose strict exchange controls in all the new ‘independent” Member States, reversing 70 years of free movement of capital, goods, services and – lacking free access to the new and third party “foreign” currencies – inhibiting severely the movement of people.

The European population at large, especially in the West, not having lived through the progressive lifting of barriers to free movement after the second WW, are, understandably, incapable of imagining the havoc that such a move would create. It would be sheer folly not to attempt all the remedies possible to avoid such a scenario. National populist parties advocating the demise of the € (implying the end of the EU) should be vigorously challenged and confronted with the positive expectations of further European integration.

Conclusion:

Unfortunately, the dire consequences of dismembering the € do not mean that it cannot happen! It could be caused either by an internal political, social or economic crisis or by external geopolitical developments out the Member State’s sole control.

One of the more likely scenarios is that, instead of being a deliberate (insane) political decision, dismemberment would result from a new financial crisis that would get out of control (which was avoided in 2008). Despite the attempts at strengthening the resilience of the international financial system, undertaken in the aftermath of the latest crisis, the current environment shows many signs of fragility among which the over-dependence on the US Dollar is particularly worrisome. Indeed, rather than be managed as a public good as was largely the case heretofore, President Trump has not hesitated to weaponize the Dollar, significantly increasing the risks of a new financial crisis. Another weakness is the growing dependence, often by default, on major Central Banks in the implementation of economic and financial policies. The case of the ECB is emblematic in this regard whose managing board has had to assume responsibilities far beyond its original remit, due to the failings of the governments of the Eurozone. These and many other risks all point to the possibility of sleepwalking into a major crisis, the extent of which could be far greater than any such previous event, because of the size of the world’s economy and the deep unprecedented – to a large extent irreversible – interdependence resulting from globalization.

Indeed, it is wholly illusory to believe that technological discoveries and their dissemination, can be held in check by throwing up barriers and a return to a world of self-sustaining isolated entities. The only way forward is a collaborative effort to regulate an increasing amount of areas through which human beings interact, either actively or passively, including markets, media, trade, weapons, climate, etc.

Concerning specifically the EU, everything, points to the fact that the sacrifices of (virtual) national sovereignty needed to ensure the long term survival of the Union, and of the €, are well worth enduring to avoid a scenario of utter chaos. Instead, the Conference for the future of Europe should lay the ground the next stage of deeper European integration as the most likely path to peace and prosperity and the perpetuation of our rightly highly prized values and civilization.

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(1)https://www.spectator.co.uk/2020/02/the-death-of-the-centre-in-european-politics/
(2)https://www.ft.com/content/a684948e-4da0-11ea-95a0-43d18ec715f5?