What’s next after the debt crisis in Greece? How will Europe handle other potential problem countries that share the euro currency – Portugal, for instance, which on Wednesday saw its debt rating downgraded? What about Spain and Italy, two more overspenders that could endanger the stability of the euro?
These aren’t merely questions of finance and economics, though those are weighty enough. Market uncertainty over the ability of Greece, and now Portugal, to handle their government debt pushed the euro to a 10-month low against the dollar Wednesday.
(For an op-ed by the Greek prime minister on how to shore up international financial regulation, click here.)
A weak euro has an upside for the 16 of the 27 European Union countries that use the currency. Their exports cost less, so they can sell more Volkswagens to Americans, for example. But imports, such as oil, cost more. And were the euro to really tank, interest rates would increase. Higher energy costs and higher interest rates would slow down economies just as they’re trying to recover.
Beyond this though, financial instability within the eurozone undermines European unity – the great experiment and aspiration of the postwar era. The debut of the euro in 1999 was a landmark for Europe, joining countries in a single currency so their citizens could more easily trade, travel, and work. Member countries received these benefits without having to give up national sovereignty – though they were all supposed to control their debt in order to keep the euro sound.
So one can understand why European Union members are considering ways to beef up their monetary union to handle potential crises on the horizon. The idea up for discussion in recent weeks is to create a “European monetary fund.” It would be based on the model of the International Monetary Fund, the globally financed institution known for its rescue – and discipline – of countries facing financial disaster.
Creating an “EMF” would be the biggest change to Europe’s monetary union since the introduction of the single currency. By more closely monitoring the finances of its members, disciplining wayward governments, and finding a way to come to the rescue if needed, an EMF might better reinforce the euro. It might also show that Europe is capable of handling problems in its own backyard.
But would an EMF be any better at disciplining big borrowers than today’s monetary union? And could countries really unite behind an EMF, which might require another treaty to create this new body? They have just gone through a bruising 10-year ordeal to ratify the Lisbon Treaty, which put in place the first full-time EU president and foreign minister. Few countries have the stomach for another big unity drive.
Even if an EMF would not require a new treaty, it will be tough indeed to agree on how to fund it, monitor members, enforce rules, and handle financial disasters, should they arise.
European countries can’t even agree on how to back up Greece. Germany, loath to bail out a far less disciplined country than itself, thinks the IMF should be the lender of last resort for Athens. Indeed, the IMF is perfectly capable of stepping in. Others feel it’s up to Europe to solve Europe’s problems. They view running to the IMF as a humiliation.
That’s pride at work, and not a good basis for either an EMF to handle potential problem countries or some other European solution for the current Greek one.
The idea of an EMF has been floated before, but has never taken root. Given the number of fiscal challenges among eurozone members, perhaps its time has come. Creating it, though, would test even those most dedicated to European unity.