BusinessDay 07 Jan 2019

Monday 07 January 2019
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BUSINESS DAY
15
In Association With
EUR not safe yet
The euro still needs fixing
How to make the single currency’s next 20 years better than the first 20
THE BIRTH of the
euro on January 1st
1999 was at once
unifying and divisive.
It united Europe’s
leaders, who hailed a
new era of tighter integration,
easier trade and faster growth,
thinking they were building a
currency to rival the dollar. But
the euro divided economists,
some of whom warned that
binding Europe’s disparate
economies to a single monetary
policy was an act of historic folly.
They preferred a comparison
with emerging markets, whose
dependence on distant central
banks fosters frequent crises.
Milton Friedman predicted
that a downturn in the global
economy could pull the new
currency apart.
For years the sovereign-debt
crisis that engulfed Europe after
2010 seemed close to fulfilling
Friedman’s prediction. But
the euro did not collapse. It
stumbled on, often thanks to
last-minute fixes by leaders
who, though deeply divided,
showed a steely commitment
to saving the single currency.
Public support for the project
remains strong. Over three in
five euro-zone residents say the
single currency is good for their
country. Three-quarters say it is
good for the EU.
However, that support does
not reflect economic or policy
success. Euro-zone countries
have never looked as if they all
belong in one currency union,
stripped of independent monetary
policies and the ability
to devalue their exchange
rates. Italy’s living standards are
barely higher than they were in
1999. Spain and Ireland have
recently enjoyed decent growth
following laudable structural
reforms, but their adjustments
have been long and hard, and
remain incomplete. In Spain
the youth unemployment rate
is 35%. Wage growth is slow
almost everywhere.
The euro’s history is littered
with errors by technocrats. The
worst was to fail to recognise
quickly in 2010 that Greece’s
debts were unpayable and that
its bondholders would have to
bear losses. Greece has endured
a prolonged depression and its
economy is almost a quarter
smaller than it was a decade ago.
The European Central Bank has
an ignominious history of setting
monetary policy that is too
restrictive for the euro zone as
a whole, let alone its depressed
areas. It was slow to react to the
financial crash in 2008, arrogantly
viewing it as an American
problem. In 2011 it helped to tip
Europe back into recession by
raising interest rates too early.
The ECB’s finest hour—Mario
Draghi’s promise in 2012 to do
“whatever it takes” to save the
euro—was an impromptu act.
Leaders may be committed to
the euro, but they cannot agree
on how to fix it (see Briefing).
The crisis exposed the depth of
the divide between creditor and
debtor countries: northern voters
simply will not pay for fecklessness
elsewhere. Economic
stagnation helped populists to
power in Greece and Italy. Because
reform has been slow, the
crisis could flare up again. If so,
Europe will have to withstand it
in a political environment that is
much more divided than it was
in 2010.
Technically, the path to a
stable euro is clear. The first
step is ensuring that banks and
sovereigns are less liable to drag
each other down in a crisis.
Europe’s banks are parochial,
preferring to hold the sovereign
debt of their respective home
countries. Instead, they should
be encouraged to hold a new
safe asset, composed of the debt
of many member states. Otherwise,
when a country gets into
debt trouble, its banks will face
a simultaneous crisis, damaging
the economy. Similarly, sovereigns
must be shielded from
banking crises. A central fund
to recapitalise distressed banks
is already being beefed up, but
deposit insurance should also
be pooled. This has been more
or less agreed on in principle,
but countries disagree over the
speed of the transition.
Other necessary reforms are
still more contentious. If the
euro zone’s disparate economies
are to see off local economic
shocks, like collapsing
housing bubbles, they need
a replacement for their lost
monetary independence. Were
countries to run a tight ship
during booms, in line with the
EU’s rules, they would have
more leeway for fiscal stimulus
in crunches. But that advice is of
no use to countries like Italy that
are hemmed in by decades-old
debts. Residents of indebted
states cannot be expected to
endure perpetual stagnation.
Instead, the euro zone
should have some centralised
counter-cyclical fiscal policy,
as Emmanuel Macron, France’s
president, has called for. This
does not mean letting countries
off reform; it should not mean
paying off their creditors. But it
might include targeted investment
spending, say, or shared
unemployment insurance, to
shield against deep economic
downturns. The aim should
be to avoid a repeat of the selfdefeating
fiscal contractions
after the latest crisis.
This degree of risk-sharing
may involve more transfers
than northern voters can bear.
But without it, the euro’s next
20 years will be little better than
the last 20. And when crisis
strikes, Europe’s leaders may
find that political will, however
substantial it was last time, is
not enough.
Israel’s opposition could
defeat Binyamin...
Continued from page 14
flict with the Palestinians. The most
popular new party, Israel Resilience,
is led by Benny Gantz (pictured), a
decorated former general. He has so
far refused interview requests, saying
his party’s aim is “to strengthen
the state of Israel as a Jewish and
democratic state in the spirit of the
Zionist vision”. Other party leaders
offer similar bromides on the need
for unity and re-ordering national
priorities.
The Labour Party has long dominated
Israeli politics, espousing a
socialist ideology. In recent years,
though, it has tacked towards the
centre and formed an alliance with
Hatnuah, another centrist party,
re-branding themselves the “Zionist
Union”. On January 1st the allies
split. Labour, which has had a series
of lacklustre leaders, has lost most of
its support. It has not led a government
since 2001 and now attracts
under 10% of the vote, according
to polls.
The other centrist parties are
younger and built around ambitious
leaders, such as Moshe Kahlon, the
finance minister, who heads the Kulanu
party, and Orly Levi-Abekasis,
a three-term Knesset member, who
leads the Gesher party. They hope to
create their own power base. Many
of Mr Netanyahu’s opponents seem
to be waiting, not for the election,
but for the legal system to bring
him down. In the coming months
the attorney-general is expected to
hold pre-trial hearings over whether
to charge the prime minister.
Mr Netanyahu says he will not
step down if indicted. An election
victory would give him some political
cover to stay on. But his opponents
believe this is the beginning of
the end of his time in office, which
in July would surpass the record set
by David Ben-Gurion, Israel’s first
prime minister. Some on the right
spy an opportunity. On December
29th Naftali Bennett and Ayelet
Shaked, the education and justice
ministers, announced the formation
of a new party, called the New
Right, which will field religious and
secular candidates. Mr Bennett, at
least, thinks that Mr Netanyahu’s job
is up for grabs.