In the midst of geopolitical, climate, energy, £, etc. crises, the fragility of the € compromises the cohesion of the European Union. This could cause a major financial crisis leading to the disintegration of the world order established after WWII. This period has presided over an era of unprecedented demographic and economic growth, scientific development, innovation and wealth accumulation that is testing the very survival of humanity.
Political debate and media attention are focused on events that are evolving so rapidly that it has become difficult to step back to analyze and understand the interplay between the events that momentarily take center stage. Thus, in the weeks since the death of Queen Elizabeth II, the Ukrainian army’s counter-offensive, the emergence of the right-wing in Sweden, Putin’s repeated nuclear threats, the weakening of his allies’ support in Samarkand and at the UN General Assembly have followed one another; more recently still, the contested mobilization in Russia symptom of desperation, the £ debacle in a context where the UK Government no longer has control over inflation, public finances or the consequences of Brexit and finally, this last Sunday, the victory of the extreme right in the Italian elections. This accumulation of events is unfolding against the continuing background of inflation, climate change, energy transition, etc.
Several of these events have individually and collectively a considerable influence over the future of the EU. While the pandemic (vaccines), the Recovery Plan (pooled funding), the Russian aggression in Ukraine (humanitarian, military supplies and sanctions), have all marked the strengthening of solidarity and of integration efforts of its Members, other signs point towards the growing difficulty in maintaining the unanimity of the 27, more necessary than ever. This is particularly highlighted by the victories of the populist parties in Sweden and Italy, which strengthen the camp of those who advocate the primacy of national over collective interests, thus compromising the security, prosperity and ultimately the independence and freedoms of all Europeans.
The growing success of national-populist parties is blocking any progress on the crucial issue of the completion of the Single Currency’s architecture under the false pretext of preserving the (non-existent) economic sovereignty of the Eurozone MSs, which is incompatible with the collective management of sanctions, energy transition, climate change, etc. In the current context, this observation is of particular importance because the setbacks of the £, which are monopolizing the attention of the financial markets, minimize the attention paid to the structural weakness of the €.
Whatever the mistakes made by political and economic leaders, whatever the consequences that the British will inevitably have to face, Britain is not in danger of defaulting on its debt, almost entirely denominated in its national currency, offering it the formal protection of its “money printing presses”. Furthermore, the structural weakness of the € could prove a decisive argument in preserving the integrity of the United Kingdom.
On the other hand, the sovereign debts of the Eurozone member countries are denominated in €, a currency which, although “legal tender” on their territories, nevertheless represent debts issued in a “foreign currency”; failing an EU budget/ECB guarantee, it makes individual sovereign debt of Eurozone Members subject to the possibility of a default. Such a guarantee is, however, contrary to the TEU and the announcement by the ECB of the new Transmission Protection Instrument, is unlikely to calm a market riddled with uncertainties, in particular those surrounding Italian debt in the new political context. The dangers generated by the persistence of inflation, the risk of recession, budgetary imbalances, rising interest rates and damage to purchasing power are cumulative and may rapidly lead to social unrest, conducive to providing additional support for nationalist and authoritarian theses.
Moreover, the ECB has to conduct its monetary policy without a valid interlocutor: 19 Finance Ministers are facing it in the Eurogroupe, which does not have the appropriate decision-making powers. This becomes very apparent when the Central Bank has to find the balance between fighting inflation and supporting growth and employment. The rise in interest rates, which has become unavoidable given the radically anti-inflationary US monetary policy, means that any moderation has immediate repercussions on the exchange rate. The € has already severely depreciated owing to policies lagging behind the FED and the reinforced “safe haven” character of the $. The recent £’s behavior has just demonstrated the consequences before our eyes.
It is therefore urgent to ensure that the financing of an ever greater share of the sovereign debts of Eurozone Members is raised through the intermediation of mutualized debt at the level of the Union, thus creating an instrument that would benefit from the (theoretically unlimited) recourse to the ECB. While this would not guarantee the relative “value” (purchasing power) of the currency, it would effectively protect against the risk of default and put the € on an equal footing with currencies such as the $, the Yen, the Renminbi, the £ etc., instead of being at a structural disadvantage which weakens its sustainability. The difficulty is that such a development comes up against the growing influence of Eurosceptic parties, whether in government or in opposition, creating an existential danger for the EU.
A return to a Europe of Nations would weaken the capacity of each nation to defend its interests effectively, as shown by the loss of influence of Great Britain and the financial, economic and social chaos that is emerging there since Brexit. Similar situations would spread inevitably with the collapse of the EU.
Finally, postponing the completion of the Single Currency architecture poses an additional risk not only to the Union but to the rest of the world: contributing to the collapse of the € by supporting divisions within the Member States could provide Vladimir Putin – without resorting to nuclear weapons – with a Pyrrhic victory, dragging the rest of the world down with him in what now seems to be his inevitable fall.
In conclusion, it is urgent to assess the vulnerabilities of the world order and to link the consequences of the multiplicity of crises that are unfolding. The incompleteness of the € is a particularly weak and exposed link in this web of intertwined and mutually reinforcing challenges.