Hans-Olaf Henkel *, former president of the German Federation of Industries (BDI)
The International Institute for Middle-East and Balkan Studies (IFIMES) in Ljubljana, Slovenia, regularly analyses events in the Middle East and the Balkans. Hans-Olaf Henkel, former president of the German Federation of Industries (BDI) writes about the future of euro and its influence on the economic situation in EU. His article entitled “Europe must drop the “one-size-fits-all” model” is published below.
Europe must drop the “one-size-fits-all” model
Is it a high time to create a “Northern-euro”? A moment for the two-gear EU, or for a three-gear Europe plus (extended) Russia?
The policy of “saving the euro at all costs” may save the euro, but it will eventually destroy the competitiveness of the entire eurozone. The euro has become an economic nightmare, creating dramatic social unrest and new distrust throughout Europe. Yet the majority of politicians continue to regard the monetary union as an economic success. Although an increasing number of economists in Germany and elsewhere criticise the proliferation of eurozone summits, the European Central Bank (ECB) and the various rescue packages, few dare to challenge the euro itself, let alone propose alternatives.
I was myself for many years an enthusiastic supporter of the euro, but today I believe this to have been my biggest mistake ever. Now I believe it is time to stop the “group-think,” face reality and propose a way out of this crisis.
Politicians usually like to equate the euro with the common market. It was the creation of the single market in 1992 that was responsible for free trade, competition and new wealth in Europe, not the euro’s introduction six years later. Today, it is not only politicians who have run out of arguments for sticking with the “one-size-fits-all” euro, but most economists too. With the eurozone getting stuck in recession, and the total number of Europe’s unemployed reaching a new record of almost 19m people, there are hardly any economic arguments left in favour of the euro.
This should come as no great surprise because the fundamental pillars of hitherto successful market-driven economies in Europe are themselves being struck down. Instead of subsidiarity being the guiding force in the eurozone, centralisation has become the order of the day. Competition between countries is being replaced by harmonisation. The national responsibility for each eurozone member’s debt is being replaced by the socialisation of debts, thereby creating a seemingly perfect system of irresponsibility.
It is true that to save the euro, vast differences in productivity between, say, Greece and Germany need to be reduced. And because of that significant efforts are being made to improve Greece’s competitiveness. But at the same time there is pressure for Germany to become less efficient. France’s industry minister said as much not long ago, and it was a seemingly logical request in light of the growing competitiveness gap between France and Germany. But the result would be all too predictable; overall competitiveness of the eurozone will not be able to keep up with the rest of the world.
The euro was originally aimed at facilitating Europe’s peaceful integration, but today, it is creating distrust, antagonism and new divides. Before the euro crisis, Germany was the most popular nation in Greece, and today it is the most hated. German-French relations, once the cornerstone of European integration, are at their lowest point in decades. The unemployed young in Athens, Lisbon and Madrid have voiced protests against “Germanic dictates.”
Worse still, the rift between the eurozone’s 17 members and the 10 countries outside it is widening. The majority of people in non-eurozone countries have lost their appetite for joining the eurozone. And as a result of news about the euro-crises on the continent, the numbers of Britons who reject the EU altogether have reached an all-time high. In short, the euro is not only destroying Europe’s competitiveness, but the European idea itself.
To save its “one-size-fits-all” currency, the eurozone is being transformed into a centralised multinational political entity. There are many historical examples of centrifugal forces leading to the eventual collapse of such states; the USSR and Yugoslavia both broke up. Even in some EU countries people resent being part of this centralised entity. An increasing number of Scots and Catalans are demanding independence. If Belgium as a two-and-a-half language country never achieved true integration, how could the EU possibly make it with 23? To force nations, regions and countries to unite under the banner of an ideology, whether it is communism, socialism or in this case an artificial currency, inevitably creates new centrifugal forces.
It seems that all the mistakes made in the first 12 years of the euro’s existence are to be repeated. New fiscal and budgetary disciplines were agreed to by 25 of the EU’s 27 governments in the “fiscal compact”, but no one is able to explain how these politicians can be sure to stick to the new rule when they broke the Maastricht ones over a hundred times before. What’s the use of Germany writing the fiscal compact’s “debt brake” into its constitution if France refuses to do likewise? Why should any of the “southern countries,” including France, ever meet their fiscal commitments in future years if they already fail to make them this year and next?
It is generally accepted that a “one-size-fits-all” interest rate contributed to the excessive indebtedness of the Greek government and the creation of the Spanish real-estate bubble, so why are politicians trying to even out these differences again? The closing decades of the 20th century saw dozens of “haircuts” like that applied to holders of Greek bonds – the last two important ones were applied in Argentina and Russia – but none was ever done without a concurrent devaluation. But since an external devaluation is impossible within a monetary union, and since an internal devaluation is insufficient to regain competitiveness, Greece will have to go to the barber again and again. It may be possible to “carry Greece through” for decades, and perhaps to bail out Spain, but the system would surely collapse if a bigger country were to knock at the door.
The concentration on Greece, Portugal and Spain has deflected attention from the real issue, France. In 2011 France’s new debt ratio was three times higher than Germany’s, unemployment there is almost at 11% and one out of four young French citizens is without a job. French labour costs surpass Germany’s by far, so it is no wonder that French industry has lost competitiveness. In the World Economic Forum’s list of the most competitive countries, Germany ranked sixth and France 18th. There are still some great French global players like Michelin, LVHM and Air Liquide, but France lacks a solid base of mid- and small- sized companies such as there are in Italy and Germany. The French public sector has ballooned to over 56% of GNP, and 90 out of 1,000 French citizens now work for the French government, whereas in Germany it’s 50 in every thousand. After the newly-elected French government increase last year of the minimum wage to record levels, its raising of taxes on business and the reduction of the retirement age for some French workers, it came as no surprise that Moody’s started to downgrade the country’s credit rating.
The new policy of imposing drastic social and fiscal reforms in the southern part of the eurozone isn’t working. On the one hand it has led to a vicious cycle, because growth there has ground to a halt, with unemployment exploding and the number of companies shrinking so that the tax base is eroding. On the other hand, the eurozone’s northern countries are being asked to compromise their prudent financial policies and act as ‘deep pockets’ to finance the south through endless bailouts.
What we now need is a controlled segmentation of the eurozone through the joint exit of its most competitive countries – Austria, Finland, Germany and The Netherlands – to create a new currency that could be called the “northern euro.” The present euro will then serve as the common currency of the remaining and less competitive countries. The advantages for the southern countries are obvious: a weaker euro would improve their competitiveness and result in new economic growth, more employment and a stronger tax base. The northern countries would have to deal with an appreciated currency, something they had been used to for decades. They would in all likelihood be joined by some of the countries currently not in the eurozone, such as Sweden, Denmark and the Czech Republic. A flexible membership system should enable switching from one system to another once the economic and fiscal situation allows it. The northern euro would be managed exactly according to the rules of the original Maastricht treaty, with a truly independent central bank. Currency fluctuations would be controlled just as the Swiss National Bank controls the Swiss franc’s exchange rate to the euro.
In some of the southern countries, a debt reduction or a so-called “haircut” would obviously be necessary. Countries departing for the northern euro should make a one-time contribution by forgoing some of the credits and guarantees already provided, giving them an “exit-ticket.” The euro should thus be adjusted to suit the existing European fiscal and economic realities, not the other way around.
* Honorary Professor of Economics at the University of Mannheim, a former president of the Federation of German Industries (BDI) and of the Supervisory Boards of Continental in Hanover, Daimler Aerospace in Munich, SMS in Dusseldorf and used Soft International in Zug
(first published by the Europe’s World, reposted by the IFIMES with the author’s approval)