An Alternative to the Euro

24 May 2012

Thursday


It continues to be a fascinating exercise to read the Financial Times each day to see the ongoing machinations and maneuvering around the fate and future of the Eurozone currency union. Some say it will be held together; others say Greece and a few others will leave the currency union and things will be fine; there are a few who insist that a Greek exit means that the currency union will collapse altogether. I have myself added to this lengthy debate with several posts, such as What would a rump Eurozone look like? and The Economic Future of Europe.


Euro area Member States
Non-euro area Member States
Member States with an opt-out

I have suggested that with the departure of marginal economies (nation-states that never were peer-competitors to the core Eurozone economies) will leave the Euro stronger than before, and with prospects for a distant futurity. The proof of this is that, while the Euro is down on international currency markets, it has not been aggressively bid down in a scenario such as would be the case if currency traders expected the Euro to be circling the drain. In comparison to other major world currencies, the Euro remains today in a stronger position than when it was first issued.


Which countries have adopted the euro – and when?


However, some of the recent arguments I have read suggesting that the Eurozone cannot continue to exist in its current form post-Greek departure have in them a hard kernel of truth. Some of this is semantics: if we say that the Euro cannot continue in its current form, all we are saying is that it could continue in an altered form. Read a little deeper in the context, though, and it becomes apparent that there rather more pessimism about the Euro than is captured by a mere semantic shift from the Euro based in the current Eurozone and a Euro based in a Eurozone minus Greece, Portugal, Spain, Italy, and Ireland.

One of the reasons that the Euro is not being aggressively bid down on international currency markets is that the core Eurozone economies have strong fundamentals, and these fundamentals are not going to disappear in a puff of smoke even if the Euro evaporates. Germany and France will continue to do business in some currency or other, and while their economies would take a major hit from the demise of the currency union, their fundamentals will ensure that they will recover and eventually resume economic expansion.

What I would like to suggest is that the Eurozone adopt a policy of economic shock therapy and take the bad news all at once, on the principle that a ratcheting downward of the Eurozone would create economic chaos and uncertainly each time a nation-state departed the currency union (a consequence of European leaders’ failure to see far enough down the road to make institutional provisions for both entry into and exit from the Eurozone). Europe could conceivably perpetuate the crisis of the Eurozone for a decade if marginal member nation-states fell away once every year or two. This would be a worst-case scenario that would set back the whole of the European economy for more than a decade as ongoing adjustments are made in the wake of further departures.

However, such a radical shock therapy need not mean the abandonment of some kind of currency union in Europe. I have suggested previously that the nation-states of Northern Europe that are on a more-or-less equal economic footing, and with more-or-less comparable social institutions and expectations, can work together well within a currency union in which tough economic standards are expected, enforced, and adhered to. Such a currency union of Northern Europe would roughly correspond to the extent of the Hanseatic League, which was a medieval trading group that flourish in the later middle ages and the early modern period — an international trading corporation before there was any such legal entity as a corporation or any such political entity as a nation-state (and therefore no sense of “internationalism” as we think of it today).

The Extent of the Hanseatic League in the late Middle Ages and Early Modern period.

A currency union in Northern Europe that roughly approximated the geographical region that once comprised the Hanseatic League would, I think, not only be sustainable, but would be a benefit to its members in the same way that being part of the Hanseatic League was a benefit to these late medieval and early modern merchants with their trading depots around the Baltic Sea. Rather than being dragged backward by non-compliant members, a union of economic peers would serve to pull each other forward. Strong provisions in any treaty governing such a union could ensure this not only by having a clearly defined legal process for departure from the union, but also, and as importantly, a clearly defined legal process to eject non-compliant members from the union.

In the map of Europe that I have colored below I have identified in a bright (Euro!) blue those nation-states that could probably cooperate in a strong Northern European currency union. This union could be “strong” in terms of its exclusivity and its willingness to exclude members that failed to maintain acceptable macro-economic targets. Membership would be a privilege, not a right; in the initial enthusiasm for the Euro, the sense of exclusivity was lost, which sentiment standing in for enforceable macro-economic standards. This Northern European currency union could be called, in deference to history, the Hansazone, and the currency could be called the “Hansa.” If the Swedes and the English could be persuaded to join too, all the better. This would work; the Eurozone as it is now constituted does not work.

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A “Hansazone” for a currency union in Northern Europe.

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signature

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Grand Strategy Annex

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5 Responses to “An Alternative to the Euro”

  1. A neo-Hanseatic League makes sense and could be the future of what would really be a rump Europe. If Eurobonds can’t happen, which I think are the only way to salvage the EU in its contemporary makeup of members (though I am skeptical it can work), then something else needs to take its place.

    I also have argued NATO should stop focusing on being “GloboCop” and circumscribe itself to intra-European stability. Given the looming issues in Europe this seems far more sensible than the vacuous concepts bandied about at the recent Chicago summit which was nothing more than theatre.

    • geopolicraticus said

      Dear Mr. Lawson,

      Just as it is difficult for an individual who has once lived in the “great world” to shift their perspective to lesser and local concerns, so too it is difficult for an organization (NATO) that has been of central global importance to accept a new role for itself as a peripheral power. This will happen in time, but it will be accompanied by all the stages of grief over the loss of power — denial, anger, bargaining, depression, acceptance — hence the theatre in Chicago.

      One of the utopian aspects of the European Monetary Union, resembling in this respect some of the utopian aspects of the French Revolution, was the attempt to create a political association out of essentially nothing. It was the project of Burke and de Maistre to use the example of the French Revolution to demonstrate the folly of de novo institutions. One of the advantages of a currency union based on the historical precedent of the Hanseatic League would be an institution with a history and local traditions in which participants can take pride.

      Best wishes,

      Nick

  2. MacTurk said

    Could I point out that the map of Euro members/non-members is very much out of date? Slovakia, Estonia, Slovenia, Cyprus and Malta should be shown as members.

    As for the basic thesis, it would simply be an exercise in reinventing the wheel, when we already have a set of wheels.

    • geopolicraticus said

      Thanks for pointing out the out-of-date map. I have changed it with a current map.

      I strongly disagree that an alternative currency union to the Euro which was composed of a different set of participating nation-states would simply be “reinventing the wheel.” While this admittedly could be the case, it would not necessarily be the case, and there would be a strong motivation not to commit the same mistakes.

      The “wheels” of the Euro aren’t turning because the participating nation-states have distinct implicit social contracts, which prevents them from cooperating in a robust sense. A monetary union that was composed of a set of nation-states with greater cultural similarities would be facilitated rather than hobbled by tradition.

      Best wishes,

      Nick

  3. Sam said

    I have always viewed the Euro as being a part of the Grand Strategy of the European “Western” elites. This continued integration is, to me, a natural progression from the defense and economic treaties that followed WWII and have circumvented any sort of resurgence of Germany as an independent power. The integration of Europe along the lines of the Euro allows the continuation of nearly all the current elites and the long-term goal of an even deeper federal Europe. While the idea of having nations withdrawl from the Eurozone has appeal, it does not have the same plan of Euro-integration in mind. A Euro-integration just as much economic and political as it security minded. The idea of any country leaving the Eurozone is most likely seen as an opportunity for Russia to expand its sphere of influence once again, especially in light of its Ukrainian exploits.

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