The eurozone as a policy laboratory
There is a long, long way to go. But confidence is gradually returning to the eurozone – confidence that at least a break-up of the eurozone will be avoided (thought his does not exclude the possibility that Greece may leave). The fall in spreads on Spanish and Italian bonds over German bunds is one positive sign. Another is the success that Mario Draghi appears to be having in his “charm offensive” aimed to reassure creditor countries that the ECB will be vigilant in protecting their interests even as it does whatever it takes to stabilise the eurozone. Draghi has effectively rebutted the criticism of the outright monetary transactions (OMT) programme – that it would be unable to enforce conditionality – by saying that even asking for a review of a country’s compliance with conditionality would trigger suspension of ECB buying of its bonds under the programme.
Experience shows that any softening of the insistence on strict conditionality is taken as weakness by national governments. The pressure to maintain public spending, to pull back from needed reforms, is just too great.
Successful conditionality is the key to the fate of the euro.
The good news is that many countries are enacting real reforms – notably Spain, Portugal and Italy. The competitiveness gap with Germany is closing. The bad news is that President Francois Hollande has yet to lead a comparable reform programme.
How does all this relate to the theme of The Money Trap? My book argues that a new international financial architecture is needed to enable the world to retain the benefits of a globalised financial and economic system. We are living through the second great wave of globalisation. The first, in the late 19th century, met with glorious initial success under the gold standard but ended in disintegration and a legacy of conflicts and depression that haunted the 20th century. The second wave could follow the same course. But this can be avoided.
A new monetary system involving a global reference currency and a new regime of banking and finance – new standards for money and banking – will be needed if such a fate is to be avoided.
Where does the eurozone crisis fit in?
The answer is clear. The countries of the eurozone are confronting the challenges and policy dilemmas that all countries participating in the globalised world economy face. These are the real challenges of making economies flexible and competitive enough to stand on their feet – in the sense of attracting sufficient capital to finance deficits, or lending sufficient capital to finance current account surpluses – without resorting to the siren calls for currency depreciation.
Already, the development of a banking union is under construction; the ECB is playing a high-risk game with great skill; countries seem inclined to pool more resources in the common effort; muddling through can work.
If the countries of the eurozone – including surplus as well as deficit countries – can take the actions needed to ensure the survival of the monetary union, then the eurozone will be in great shape to face collectively the even bigger challenges coming from the globalisation of capital.
In such a case, the underlying strengths of the eurozone – better consolidated fiscal position than other major developed countries, highly skilled labour forces, massive scientific and engineering resources, less unequal societies that those of the US or UK and if the sovereigns sort themselves out, less damaged banking systems – will give it key international advantages.
What the eurozone must then do, looking ahead to that distant day, is to bend its energies to creating an international order within which all participants can prosper. It will need to look outwards rather than remain obsessed, as it has been for the past 12 years since its creation, with internal matters.It would be a new Bretton Woods. It would fulfil Keynes’s vision of an international monetary system with a respected standard but room for national policies to operate.
The major creditor country, Germany, has every interest in leading this renaissance of the old continent. So does its strategic partner, France. My bet is that, in the end, they will succeed. Then, with China, they could imprint their vision of an orderly system on the world.
In this way, the eurozone could be a laboratory for policy-makers wishing to get to grips with the real dilemmas that face us all.