Getting the euro back on track

 

FOLLOWING LAST week’s euro zone summit decisions to support Greece and prevent contagion spreading to other members of the single currency, many commentators and most markets have remained doubtful whether it has succeeded. A solid political commitment to prevent the euro disintegrating is evidently there, but the means to do so are still lacking. That too much should not be expected from one crisis meeting is obvious in this rapidly moving process. That it must move beyond crisis management to a more definitive resolution is made explicit in French president Nicolas Sarkozy’s promise to bring forward with Germany an “extremely ambitious plan for greater economic integration of the euro zone”.

Politics and markets compete for dominance in this uncertain period for the single currency. This European story is part of a wider one involving the US dollar’s role as a reserve currency and the emergence of other strong regions and states. Consistently the collective response by euro zone leaders has been too little too late. What the UK chancellor George Osborne calls the “remorseless logic” of the single currency project, away from its original minimalist design towards a more complete economic union, runs well ahead of what the states and peoples directly involved in the euro have been prepared to do politically. But if it is not to fall, the French and German finance ministers wrote yesterday, its members must “adopt a fiscal and economic policy that reflects their joint responsibility for the common currency”.

This is the context in which greater economic integration of the euro zone must be considered. French policy has consistently favoured economic governance of the euro. Mr Sarkozy says it is no longer possible to disconnect the currency from economic policy. He describes the arrangements now agreed on greater help for Greece and more flexible use of financial stability funds as a step on the way to a European monetary union. President of the European Central Bank Jean-Claude Trichet has floated the idea of a European finance minister. Italian, Spanish, Greek and Irish ministers have supported the idea of euro bonds to provide mutual debt guarantees and common debt issuance in the euro zone.

These major elements of greater economic integration must be brought together into a coherent design if the euro is to retain credibility. German leaders are now convinced that it is fundamentally in their interest and are willing to open the debate, even if, as appears likely, this results in some form of transfer union. While that would fall well short of what is done in large national federal states, it may validly be compared with them. The obverse is that the economic disciplines built in will certainly reflect German concerns.

Other euro member states, including smaller ones like Ireland, will have to define and defend their interests in this emerging project. It cannot be dominated only by the largest states. All their peoples, too, must be fully involved if it is to be politically legitimate. Otherwise the economic, political and popular logics involved will collide and explode.