Today we have a response to that piece from Professor Brigitte Granville and a further comment by the author of the original essay,
To the editors:In his essay, Gilles Dryancour identifies some of the threats to the survival of Europe’s monetary union.1 Such honesty is rare. Doubts about the future of the euro are often unwelcome in polite society, and those expressing such views must proceed with great care. This state of affairs can be attributed to political fears that dismantling the monetary union may prove fatal for the European project, leaving the continent vulnerable to the racist and protectionist programs of the nationalist right.
This concern was clearly evident in a letter published by Le Monde prior to last year’s French presidential election.2 The signatories, a group of eminent economists that included no fewer than twenty-five Nobel laureates, were writing in response to the nationalist candidate Marine Le Pen, who had cited some of their work in support of her euroskeptic platform.
In a trenchant critique of the letter, Roberto Perotti stressed that appeals to authority—by which he was referring to the prestige of the Nobel Prize—are never a convincing way to close a debate.
Economists like to boast of being hard-wired to debunk. So since when did the authority principle hold sway among them? This situation is starting to look like a small-scale version of the Protestant Reformation. For all the fire and fury of their pronouncements, anathemas and excommunications, and for all their academic titles and ecclesiastical benefices, the scholastics found themselves swept away by Luther and Calvin.3Perotti’s critique demonstrates the folly of making opposition to the euro a taboo. The political dangers thought to be inherent in a eurozone breakup, are, in fact, already emerging in the less competitive member states as an economic consequence of the single currency. Namely, the high unemployment, low growth, and dire prospects of poverty are turning European voters toward nationalist candidates and parties. Nationalism is one of three reasons identified by Patrick Conway to explain why monetary unions are dismantled.4 The other reasons are avoiding contagion from monetary shocks originating in other member states and increased control over the collection of seigniorage.
Economic and Monetary, but Not Political Union
Right from the beginning, economists warned that efforts to create a European counterpart to the United States would fail.5 The formation of the Economic and Monetary Union of the European Union (EMU) may have been motivated by utopian ideals, but, according to economists, the union was more likely to lead to dystopia. Writing in 1997, Milton Friedman observed that
Europe exemplifies a situation unfavourable to a common currency. It is composed of separate nations, speaking different languages, with different customs, and having citizens feeling far greater loyalty and attachment to their own country than to a common market or to the idea of Europe.6In 2001, Jean-Jacques Rosa declared,
Europe is making the worst mistake since the deflationary policies of the 1920s which turned the 1929 stock market crash into a decade of tragedy. The single currency is not a decisive advantage for the continent. It is a time bomb.7According to Martin Feldstein,
Instead of increasing intra-European harmony and global peace, the shift to EMU and the political integration that would follow it would be more likely to lead to increased conflicts within Europe and between Europe and the United States.8Béla Balassa’s theory of economic integration stressed that monetary unions do not work without political integration.9 “Political unity,” Michael Bordo and Lars Jonung observed, “is the glue that holds a monetary union together. Once it dissolves, it is most likely that the monetary union will dissolve.”10....
...Dryancour concludes that Italy would be the most likely cause of any eurozone breakup “unless the deterioration of TARGET2 balances forces Germany to leave first.” TARGET2 is the settlement system for euro payment flows between banks, operated by the eurozone’s system of central banks—the ECB and the national central banks (NCBs). Germany’s net TARGET2 assets have risen to almost a trillion euros. It is for this reason that Dryancour believes TARGET2 should be seen as a potential cause for the collapse of the single currency.
In a footnote, Dryancour appears to offer a somewhat revised view, describing TARGET2 as being closer to a symptom than a cause. This seems a more accurate summation. He makes explicit reference to TARGET2 imbalances reflecting imbalanced trade....
I would like to sincerely thank Brigitte Granville for her thorough analysis of my essay. Her comments perfectly complement my diagnosis of the structural dysfunctions of economic and monetary union....MORE
I have been writing about the euro since 1998, not with the goal of questioning those who defend the single currency, but with the desire to understand its implications for our economies. I have no particular antagonism toward the euro. My thoughts could have targeted any currency of the same nature, such as the single Italian lira issued in 1861 that Granville rightly mentions. It is an indisputable fact that this monetary unification, instated by the leaders of northern Italy, permanently impoverished the Mezzogiorno through mechanisms comparable to those that feed Germany’s enrichment today.
In my article, I favored the example of German monetary unification after the fall of the Berlin Wall since its effects are less known by the general public. This example is also chronologically closer to the euro; only eight years separate the disappearance of the ostmark on July 1, 1990, and the implementation of the euro on January 1, 1999. By 1999, German monetary unification had already realized most of its negative consequences, in particular the loss of competitiveness of the East German economy, which led to its deindustrialization, followed by the departure of two million East Germans, often young and qualified, to the West. West German leaders had competent knowledge of the harm that a fixed exchange rate currency could cause when uniting two fundamentally heterogeneous economies.
The question then arises: What did German leaders expect from the euro, beyond the end of competitive devaluations in the internal market? It is difficult to respond without falling into historical reconstruction; nevertheless, it can be argued that they did not act against their own interests.
Both the German monetary union and the European monetary union strengthened West Germany’s economic power. And the latter did so much more. Unlike when the mark was unified, the euro was not accompanied by a transfer of wealth from West Germany to the less productive members of the new monetary union. On the contrary, Germany has managed, over the last three decades, to have the cost of its own reunification partly financed by European taxpayers through the union’s structural funds. Admittedly, this has occurred in modest proportion—80 billion euros out of 1,600 billion between 1991 and 2015—but it is nonetheless morally questionable since some of these transfers took place after the eurozone had formed.
As Robert Mundell thought, the proper functioning of a monetary zone without internal devaluation requires the geographical mobility of individuals.26 Otherwise, unemployment will eventually increase and concentrate in the least productive regions of the currency zone....
