Friday, 12 February 2010

The Real Test for Euro Membership

When I was a student we still only had the exchange rate mechanism of the European Monetary System. But being the great fan of Sci-fi that I was my dissertation looked to the future and a European currency, I pointed out that the real test for such unity wouldn't come in the good times but would come in the bad, then I said it would depend how Germany, France, Italy and the UK (yeah I was an optimist) reacted when times were tough and part of the zone needed help.

Well it may be almost twenty years later but such a crossroads has been arrived at. Or to be precise we've been standing at that crossroads for sometime waiting to stride off confidently but now we're about ready to head off, we're not sure what to do.

The issue of course is Greece.

The EU leaders have said they are prepared to deliver a rescue package for the Greek economy and to shore up the integrity of the Eurozone, they just haven't announced the details yet. But at the end of over a year of such support for other EU economies some nations are not happy. This morning on the news I heard mention of some in Germany being up in arms and saying enough is enough and saying they would be better returning to the Deutchsemark.

Of course there are criteria for entering the Eurozone these have to be met before admission is allowed. These are clearly laid out to EU member states that wish to enter. The issue of expulsion isn't so clear, but there is talk that some wish to remove Greece. Indeed Phoebus Athanassiou writes in a European Central Bank working paper that such a move in almost certainly illegal, there is no exit criteria only for entry.

Of course the reason for setting up the Euro was to allow competitive advantage, economic stability and smooth out the dips that any one Euro member would have against the world economy. The larger nations would benefit from the security if their prices across the zone and the ability to plan within the world. The smaller nations would have the security blanket of the more established nations, benefiting from the economy of scale to help them develop. That is all well and good when times are good, even when they are stagnated, but not when they are dipping sharply.

There is the option of voluntary withdrawal a country then could in theory devalue its currency to improve competitiveness and to set its own interest rates.But either expulsion or withdrawal would not be an easy option. Don't forget as well as Greece, Ireland, Spain and Portugal are also finding it tough just now.

The Options
  • Expulsion - verges on illegality, plus needs to create a new European Community minus the expelled member.
  • Voluntary withdrawal - at this stage almost impossible to withdraw from all the institutions needed to be in Eurozone without withdrawing from EU itself.
  • Withdrawal keeping Euro - Some states outside the EU currently operate the Euro so would be possible to withdraw, revalue and keep Euro at new rate.
However, as I said above the smaller nations saw the Euro as a security blanket. Any move to expel would lead to insecurity of the remainder, it could see the unravelling of the EU.

The thing is that the Eurozone countries have to be in this together, that was the agreement, that was the commitment that was made. Like a marriage it is for sickness or in health and divorce is a whole lot messier with so much involved.

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