Some interesting points on a recent presentation i went to on the Euro“I believe the euro can work, but only if we repair its faulty original architecture in the right way,” said Mayer. “A new framework for the euro must be based on two elementary principles: first, the euro must be a non-political currency, shielded from any form of fiscal dominance by the Economic and Monetary Union (EMU) member states; second, sovereignty and liability in essential fiscal policy matters must be firmly aligned at the national level.”
Mayer explained that even prior to the introduction of the euro there were faults in the design of the system that were not addressed. Using an aircraft analogy, he said that “the architects of the euro proceeded with take-off despite one of the two engines having failed”.
In spite of its inherent faults, Mayer asked why the euro has worked so well for nearly the first 10 years. The answer: cheap credit. “Although the criteria for an optimum currency area were ignored and the Maastricht criteria for EMU entry not strictly enforced, EMU had a successful first decade. Cheap credit was the glue that held the EMU together,” he said. “When the credit bubble burst, the EMU became unglued,” Mayer noted.
A balance of payments deficit crisis ensued. Since, the European Central Bank (ECB) has provided lending to countries in dire deficit difficulties, mainly the ‘GIIPS’ (Greece, Italy, Ireland, Portugal and Spain), and has kept banks alive by buying bonds of governments when private credit dried up.
The role of the ECB as a “lender of last resort” has been crucial, but Mayer underlined that this should only be a temporary solution.
Forward or backward?
Mayer said that the creation of a “superstate”, in which there is joint debt issuance, will not solve the currency crisis. “The peoples of Europe are not prepared to yield sovereignty in key policy areas. The only way forward is back to national sovereignty and liability in financial affairs,” he said.“Europe needs the euro and a new foundation for the EMU is necessary to achieve the four objectives: price stability, fiscal discipline, financial stability and economic flexibility,” said Mayer.
He emphasised that a new EMU framework should have a crisis management mechanism at the centre, serving as the lynchpin, and a safety mechanism throughout to ensure the smooth operation of the currency. Learning from past mistakes, he commented: “Essentially, the Maastricht framework for the EMU lacked procedures for crisis management.”
Just as important, clarity in the future of EMU is essential. Mayer highlighted that during the euro rescue attempts in the last couple of years, a lack of leadership and clarity about the future architect
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