Rather than a single currency, the euro might be considered the materialization of a fixed exchange rate system, what EMS had been before it. On the one hand, the latter has allowed Member States with the highest public debt, to refinance for years at very low interest rates (a significant advantage) and private companies to simplify the accounting and export processes, but on the other hand, it is showing all the critical points that a system like this produces over time and which is amenable to the description of the Frenkel cycle:
- Accepting the monetary union, the country liberalizes the movements of the capital.
- Foreign capital flows in, because it finds it convenient to invest in a country where interest rates are higher, but the foreign exchange risk disappeared.
- Cash flow increases consumption and investment, and makes the GDP and employment grow.
- But also inflation and private debt grow; besides, equity and real estate bubbles are created.
- A random event creates panic among foreign investors and they stop funding.
- A crisis begins: it triggers a vicious circle of GDP decline and rise of the public debt. The government cuts public spending and raises taxes, thus aggravating the recession.
- The country is forced to abandon the fixed exchange rate and depreciate.
At present, it seems like we have reached point 6 whereas the evolution described in the first five points seems really the Eurozone from 2002 to 2011, the outbreak of the sovereign debt crisis in the peripheral countries.
Can all these problems be generated by the adoption of a single currency? How come the opinions on it are split between supporters of the currency neutrality and those advocating for a return to the monetary “sovereignty”? Who is right?
Let us think, first of all, about what is a currency. It is certainly a means of payment, a “commodity cash” created to encourage trade and prices formation, it is not a trivial function, to be used as a “store of value”, i.e., for savings. In a balanced world, in fact, it would be neutral and any change of the unjustified monetary mass would cause inflation, in case of increase, or deflation, in case of decrease, to bring the system back into a situation of equilibrium and leave the real value of the stock exchange unchanged.
A “balanced world” means that the following conditions need to be satisfied at the same time: free movement of goods, people and capital, lack of market access barriers, and perfect information (simplifying the question).
It is obvious to everyone that the globe does not present any of these features, rendering criticism to political “neo-liberalism” – that have never been seen in the actions of the States – almost ridiculous. In view of this assessment, we cannot say that a currency can be neutral. Monetary policies have, therefore, a significant impact on the markets.
It does not take long from here to criticizing the single currency, although the actions of Mario Draghi’s management in the ECB leadership have given centrality to currency-related decisions in the European economic policy. Demonstrating how the serious and consistent work of the Central Bank can defuse also a crisis that seemed capable of leading to the implosion of the whole area.
The real problem of the euro, then, is the timing and the modalities with which the “single currency” was introduced. It was a kind of “original sin”, having wanted to use the currency as a vehicle to push for greater political and economic integration of the whole Eurozone, without understanding that the adoption of a single currency is the consequence of a process of aggregation and harmonization of the underlying market. The question that arises at this point, is “Are the Euro and the EU still going to exist in ten years or so?”