The euro’s existential crisis subsided several years ago but it would be wrong to assume it has disappeared. The forces that could undermine its integrity have not vanished.
Economists have long recognised the monetary bloc’s fundamental flaw. The euro-zone consists of distinct national economies.
Germany’s economy, for example, is far more productive than that of, say, Greece or Portugal. Indeed, it is sobering to remember that such divisions have, by many measures, widened in the more than two decades since the euro’s launch.
Such disparities inevitably create tensions. The appropriate level of interest rates can vary between different member states. This inevitably creates resentment among those who believe the European Central Bank sets rates at the wrong level to meet their particular needs.
As a result, the euro-zone is in a permanent state of unstable equilibrium. Although it may appear robust at any particular time, as it does now, there is always the possibility of new fissures emerging.
Such a situation could continue for a while but in the long term there are two ways in which it can be resolved. Either the euro-zone could be redivided into autonomous nation states – inevitably a disruptive process – or it could proceed with the process of integration towards a fully federal state.
Naturally most europhiles prefer the latter option in principle but it is hard to implement in practice. Such a process has the potential to throw up resistance even from ardent supporters of the European project. For instance, the wealthier countries of northern Europe tend to get worried about anything that suggests the possibility of having to bail out the poorer economies of the south.
So as things stand, the euro-zone seems to be in a peculiar form of limbo. Moves in either direction are fraught with difficulty but its present uneasy state arguably cannot last over the longer term.
The natural inclination for today’s generation of pragmatist policy-makers is to try to muddle through. They would rather wait for problems to emerge before tackling them, instead of pro-actively addressing the euro-zone’s structural weaknesses.
“The euro-zone seems to be in a peculiar form of limbo. Moves in either direction are fraught with difficulty but its present uneasy state arguably cannot last”
Although the appeal of relying on inertia is obvious, it is not without risk. Indeed, the new political cleavages emerging in Europe are likely to make it harder to maintain the euro-zone’s uneasy stability.
When domestic conflict is relatively muted, it is easier for EU member states to come to an accommodation with their peers. But the rise of internal strife means that there is less room for manoeuvre for national authorities and less scope for co-ordinated action.
There are no easy solutions to the impasse.
Daniel Ben-Ami, Deputy Editor