When Saxo Bank opened an office in Prague in May 2009, I met with the then Czech President Václav Klaus. He has been a beacon for freedom and for confronting state abuse and injustice since long before the fall of the Iron Curtain. We discussed the Eurozone crisis, which was then underway, though few had noticed. We agreed that the biggest challenge facing the EU – the reason why it is moving ever closer towards economic disaster – was the euro. In Klaus’s book Europe: The Shattering of Illusions, he calls the Eurozone crisis “the interim phase”. His point is that, if Europe wants to restart its economic development, it must undertake a fundamental transformation. But for that to happen, we need a bold new vision for Europe.
The idea of a common European currency goes back to before the European Economic Community (EEC). It was even discussed by the League of Nations, but the Werner Report in 1970 finally put it on the EEC’s agenda. And while the euro is the root of most of the EU’s problems, the idea of a common currency seemed logical. If you could create a union, with a bigger population than the US, it would be reflected in political power.
The central problem, however, is still that most European citizens do not want to create a political union – the foundation for monetary union. The citizens of wealthy countries do not want to give up their identities, or to see their economic achievements become part of a collective pool. The greatest enthusiasm for the original project was in economically weaker countries. They saw the advantages, but even they weren’t ready to discard their nationalities.
European politicians knew that a political and financial union was a necessary precondition for a well-functioning common currency – there was no shortage of warnings in the final days of its creation. But politicians chose to start the project with a foundation of sand. They expected to create this foundation piece by piece, without caring to ask Europe’s populations. And that process is being continued relentlessly in countries like Denmark, which are not even members of the euro.
But by joining a common currency, countries disregard some of the tools their national central banks would normally have at their disposal. The most obvious is the option to adjust currency rates, either through devaluation or revaluation, or to leave the rates to the financial markets, which is the norm for most other asset classes. The second is the option of adjusting economic trends by short-term interest rates. Both are important. Their absence carries the seed of potential disaster, if there is no agreement that inequalities can be regulated in different ways – through common bonds, fiscal transfers and so on. Think of what happens within nation states. Lolland, the Danish island, would be in dire straits if it had to find financing in international markets. But as part of Denmark, with national money transfers, its problems are resolved smoothly.
If you imagine Europe constructed as a nation state, many issues would be resolved – though the overall economy would still not be something to brag about. But it requires independent states to accept the same role as a little Danish island, while prosperous areas in Europe must be willing to take responsibility for the weaker areas.
We are far from achieving this. Merkel’s mentor, Helmut Kohl, the great re-unification Chancellor, thought you could draw a political line under Europe’s fractured past, with economics playing a lesser role. Das Mädchen, as Kohl used to call Merkel, fortunately lacks this naïvety. She has developed a pragmatic approach to the EU, and for that reason socialist France calls her Madame Non.
Merkel has said “nein” to centralised EU economic governance, “nein” to a permanent bailout mechanism and “nein” to the idea of euro bonds, which she called “economically wrong and counterproductive”. Her handling of the crisis explains French disenchantment with Europe, revealed in a Gallup and Pew Research Center poll in May 2013. Former European Commission president Jacques Delors, who presided over the creation of the euro, has attacked a “punitive and alienating” Europe.
But Merkel’s Europe is not punitive or alienating. It’s fair. She wants states to follow the rules and to become more competitive. She is a problem-solver. But politics is also about new ideas – setting an agenda instead of following popular sentiment. Merkel has yet to do that. Germans are in no mood for change – Merkel will likely win elections on 22 September. She will stay the de facto leader of the EU – its future and its currency will be determined by this former research chemist. But the research is over. We must now re-evaluate the EU.
Lars Seier Christensen is co-chief executive of Saxo Bank. He will be discussing these issues on 13 September, at Saxo Bank’s #Trading Debates – The end of the euro as we know it. Speakers include Ukip leader Nigel Farage, and former Czech President Vaclav Klaus. Visit www.tradingdebates.com or follow @saxomarkets