There was a poor turnout at the European parliament elections in May this year, with only four in 10 registered voters showing up. Nearly a quarter of those voted for parties skeptical of Europe and the euro. This apathy and lack of faith reflects a European Union and a monetary union in pretty bad shape.
History contains no real examples of a monetary union that did not either ultimately fall apart or form a political and fiscal union. Two monetary unions have survived – the United Kingdom and United States – and both formed political and fiscal unions.
When the president of the European Central Bank, Mario Draghi, declared in August 2012 that the euro was “irreversible,” his assurance helped stabilize the escalating debt crisis in Europe. But since it is not the central bank but governments that determine the currency and exchange system, uncertainty has continued.
In 2010, for example, the debt crisis in Greece was so tangled up with banks and financial markets in other euro countries that no one was ready to risk default. Rescuing the banks saved the euro, but its acceptance by the general population suffered as a result.
The same tangle of bank debts and national debts exists today. The banks of the euro zone currently hold €2.9 trillion in debt with respect to their member countries – roughly one-third of the annual gross domestic product for the region. But because there is still no mechanism that would allow a country in the euro zone to go bankrupt, the question arises: Will the “no bail-out clause” – Article 125 of the Lisbon treaty, which makes it illegal for one member to assume the debts of another – simply be ignored in the future?
The first steps have been taken. The so-called two-pack and six-pack regulations and the European Fiscal Compact allow for better monitoring of public finances and macroeconomic imbalances. They also give finance ministers in euro countries the de facto right to veto budgets of individual countries.
On top of that, the European Stability Mechanism constitutes a safety net for countries threatened with loss of access to credit markets. The European Central Bank will monitor the largest banks of the euro zone through the recently established bank union, and the uniform winding-up mechanism will regulate the termination of insolvent banks, including new rules concerning the hierarchy of creditors.
Yet the economic cycle continues and the next crisis will likely lead to even more unemployment and uncertainty. Banking and public debts are still interconnected, so insolvent countries will probably be rescued. All of this does not bode well for the future of the euro.
What’s required for the future of the euro is a political vision.
To survive the next crisis, several grave weaknesses in the management structure of the euro zone must be eliminated. First, there must be a more just distribution among member states of the burdens arising from unemployment. Second, institutional uncertainties must be reduced by removing the links between banks and countries. Finally, the very structure of the monetary union must be strengthened so it can endure payment defaults by any member state.
In 1989, the former European Commission president, Jacques Delors, issued a step-by-step guide to forming an economic and monetary union in Europe. It was a milestone in the introduction of the euro.
Now a new path to a stronger euro zone should be laid out in the form of a fiscal Delors report. It would be a guide to a more robust political and fiscal union that evolves over several phases and an extended period of time.
The relative quiet in euro-zone financial markets at the moment is mainly due to efforts of the European Central Bank to preserve the monetary union. But monetary policy has its limits. What’s required for the future of the euro is a political vision. For now, though, that seems less likely given recent results in European elections.
From an investor’s point of view, it means being thankful to the European Central Bank. But for now at least, you shouldn’t put all your eggs in the euro-zone basket.
Andrew Bosomworth is head of portfolio management at Pimco Deutschland. He may be reached at email@example.com