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Time and again we have heard European Union officials stressing that the Euro is irreversible and that any speculation on its potential breakup is completely groundless. Though I myself remain slightly optimistic and am not an advocate of a breakup of the euro as a solution to the particular or the general challenges that national economies and the euro zone face; I must stress that such emphatic oratory fails to impress investors and citizens for the mere reason that it is not reflected in concrete and coherent action plans.
How can the euro be irreversible when there is a growing convertibility risk in peripheral countries and especially –but not exclusively– in Greece? If investors are already pricing such risk, then their belief is that the chances are certainly not as ancillary as some would like to believe. In case one might reject with slight contempt the way investors are pricing bonds, fallaciously labeling them as mere “speculative attacks” (note that markets do not “attack”), I must point out that the president of the European Central Bank, Mr Mario Draghi admitted in his latest press conference on August 2, that there is such a convertibility risk; which means that investors may be forced to convert their euro-denominated investments into newly introduced national currencies. As a matter of fact Mr Draghi said:
We want to repair monetary policy transmission channels and we clearly see a risk, and I mean the convertibility premium in some interest rates.
In addition how can they even speak of an irreversible euro when the very institutions and mechanisms that would guarantee the coherence of the single currency are not in place, or if there will be any, their scope will remain limited? I am of course referring to the need for a genuine political union, featuring a banking union, a fiscal union and mechanisms for collective action and for the mitigation of asymmetric shocks (e.g. eurobonds). While there seem to be steps towards that direction there still are many lacunae in the decisions that have been taken thus far. There also are many variable parameters and potentially destabilizing factors in the broader political environment, such as the viability of the new coalition government in Greece, the possibility of Portugal asking for a second bailout, the further deterioration in Spain’s or Italy’s position, the upcoming elections in the Netherlands, the 2013 budget that French President Mr Hollande will present with austerity involved (contrary to his anti-austerity palaver), the ruling of the German constitutional court over the constitutionality of the ESM etc. With so many issues open, I think that the euro is not robust to a range of possibly lethal shocks. Such a fluid political environment does engender a profound disbelief in the capacity of European leaders to hold the euro together even though some progress seems to have been achieved.
Ultimately how can a single currency, a monetary union to be more precise, be irreversible when it is comprised of sovereign nation-states which may exercise their sovereign right to withdraw from the EU? The fact that the European integration process has hitherto been forwarded along nationalist (inter-governmental) lines, means that nation-state sovereignty has in fact been preserved. In the absence of an overriding European state, ideally a decentralized bottom-up federation, any member-state of the EU remains sovereign in the sense that it may withdraw its membership if it finds it to be a hindrance to its national interest (for more see: A (euro)crisis of nationalism). Such a right is enshrined in the Lisbon Treaty itself, but I am more than convinced that shrewd lawyers and legal theorists would always find a loophole or a gray zone in some piece of legislation to justify such an act, with the Doctrine of Necessity being but one valid paradigm. That said, the very notion of irreversibility by some EU-inspired fiat, casts to the wind everything we know about legal theory and history, i.e. treaties are made to be broken.
The above are but a few thoughts on economic, political and legal issues concerning the alleged irreversibility of the euro. It seems clear that there is a possibility of a partial or even full breakup, even though I personally believe that such an outcome would be suboptimal for all sides involved. Ideally the euro ought to be irreversible in the sense that it should have all those institutions in place that would guarantee its sustainability, not just on economic grounds, but most importantly on political/democratic and social ones. Such an indeed desirable order requires determined action and audacious steps forward, not the kind of enervating wishful thinking and empty pontifications we often listen to from official sources. For the time being the euro is rightly shrouded in a mist of uncertainty and will remain there for as long as there is no systematic treatment of the eurocrisis.
Picture credit: Wikipedia