Le magazine du trésorier - n°75 - 3ème trimestre 2011 - (Page 10)
The euro’s existential challenge
by Prof. Dr. Bruno Colmant, Member of the Royal Belgian Academy
n 1999, after twenty years of currency crises, the fluctuation bands between several European currencies were tightened so that they could be merged into a common currency. The euro was born. At that time, the Member States were initiating a Bretton Woods-type European agreement, this time dissociated from gold parity.They abandoned the guardianship of their own currencies and deprived themselves of their regal right to mint coins. Immediately, we saw a convergence of interest rates, an end to competitive devaluations and facilitation of trade within the Community. However, economists who understood the consequences that such a choice would bring about were rare. The euro was, and still is, based on the premise of the mobility of factors of production. Indeed, from the moment when states are constrained by a common currency without the ability to devalue or revalue their national currency, it becomes the role of the factors of production, i.e. people and capital, to become more flexible, moving back and forth between labour markets and areas of growth.
This evidence is confirmed by the theory of optimum currency areas, introduced in 1961 by Robert Mundell, recipient of the Nobel Prize in Economics in 1999. Mundell suggested that it is in countries’ interests to form a currency union if the mobility of the factors of production (work and capital) inside the area concerned is greater than
kets, social system disparities, diverse pension systems, contradictory inflationary pressures, demographic differences, a lack of synchronization of economic cycles, etc. We have thus arrived at a singular contradiction – the combination of a common currency and the financial crisis. We might have imagined that following the creation of a currency union, the financial sector and the labour market would grow less tense. But we have seen just the opposite: after the bank crisis and the financial demands of the states, the financial sector has been put back into the public sphere whilst the rate of labour mobility has remained very low. We may moreover wonder if the euro, which constitutes a decisive choice based on the market economy, does not present a deep contradiction with the growing influence of a majority of European states in their own economies. If any doubt about this reality exists, one needs only to note that today, it is the financial markets that impose sanctions on states that are unable
The euro marks the end of the welfare state and budgetary indiscipline
that which predominates outside of it. If the opposite case is true, it is in the interest of the countries concerned to maintain flexible exchange rates. This is why the euro is not yet an accomplished fact. The factors of desynchronization are many: antagonistic geographies and growth models, the absence of a federal European tax system and budget, inconsistent access to financial mar-
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Le magazine du trésorier - n°75 - 3ème trimestre 2011