Now more than ever, the world is raising serious concerns about the long-term viability of the EMU. The crisis in Greece and the deep divisions between Athens and its creditors regarding the viability of fiscal “adjustments” have laid bare the currency bloc’s weaknesses and have underscored the difficulties inherent in managing a common currency in the absence of political and fiscal unity.
Reservations about the "experiment" recently caused the likes of Poland and the Czech Republic to express their reluctance to adopt the common currency with Polish central bank chief Marek Belka hilariously characterizing the EMU as a "burning building." "You shouldn’t rush when there is still smoke coming from a house that was burning. It is simply not safe to do so. As long as the eurozone has problems with some of its own members, don’t expect us to be enthusiastic about joining," he said.
Of course once the house burns down and the former occupants (those that made it out anyway) are standing around outside surveying the still-smoldering ashes, no one wants to be labeled an arsonist, which is presumably why Germany’s five economic "wisemen" decided that now might be a good time to pen a "special report" (press release, executive summary) on crisis response in the euro area.
Unsurprisingly, the "independent" assessment of the German Council of Economic Experts concludes austerity programs in Spain, Ireland, and Portugal were "successful" and as for Greece, well, they don’t know what happened there but it’s certainly not entirely the fault of misguided crisis management and if anything, it simply means that member countries should turn over more of their fiscal autonomy to Berlin Brussels.
"The situation in Greece should not be taken as proof of failure of the rescue policy as such. Firstly, the crisis response averted a systemic crisis and thus maintained the cohesion of Monetary Union. Secondly, the time was used to implement reforms to make Monetary Union more resilient against economic crises. Thirdly, the economic situation in Ireland, Portugal, and Spain has improved markedly," the council says, before adding that "it has become evident in the past years that the euro area member countries are overwhelmingly unwilling to give up national budget autonomy."
The wisemen continue:
The recurring debates about assistance for Greece should, in the Council’s view, not distract from the evident successes of euro area crisis policy. Firstly, it managed to avert a systemic crisis in the currency area, which would have done great damage to all its member states. Secondly, important institutions like the banking union and the ESM were created to make the euro area more resilient. Thirdly, assistance programs adopted by debt-stricken states shielded their citizens from the worst effects of the crises.
Yes, successful austerity programs "shielded citizens from the worst effects of the crises," which we suppose is why debt-to-GDP ratios in the periphery are even higher now than they were before despite a few rather unfortunate economic outcomes such as 25% unemployment in Spain and formerly prosperous Greeks scavenging through the trash for food.
As for why Greece has yet to respond favorably to the carrot-stick approach which has proven to be so "successful" in Spain, Ireland, and Portugal, well, it has a lot to do with Greeks being unwilling to take responsibility for their own actions and, perhaps more importantly, to the Greek government’s refusal to "make use" of the experts at its disposal who have recently demonstrated a remarkable penchant for Einstenian insanity by demanding that Athens adopt a policy of deep fiscal retrenchment in the middle of a depression:
The economic turnarounds in Ireland, Portugal, Spain and - until the end of last year - also in Greece show that the principle "loans against reforms" can lead to success. For the new program to work, Greece has to show more ownership for deep structural reforms. And it should make use of the technical expertise offered by its European partners.
Fortunately, the report makes some recommendations to improve the long-term viability of the currency bloc. First, there should be a plan in place for states to go bankrupt and in the event a member state - get this - "fails to cooperate", the euro area must "stand firm against [these] uncooperative debt-stricken governments" and allow them to "exit the Monetary Union" - as a last resort of course.
"The goal is to reduce sovereign debt through the consistent application of fiscal rules, and to make the no bail-out clause credible by establishing a sovereign insolvency mechanism. To ensure the cohesion of monetary union, we have to recognize that voters in creditor countries are not prepared to finance debtor countries permanently. A sovereign insolvency mechanism would be an important tool to prevent crises. Much like the recently agreed creditor-participation in the event of bank insolvencies, a sovereign mechanism would force creditors to shoulder losses if states went bankrupt. This would spur investors to assess sovereign risk in more detail. Given high euro area sovereign debt levels, the Council views the introduction of fixed debt thresholds for bankruptcy proceedings as impracticable in the near-term. But that should not stop euro area governments from starting work on an insolvency regime immediately. This would reduce the chance that taxpayers would again have to take over the risks of sovereign bondholders when a state stumbles over its debt mountain. A permanently uncooperative member state should not be able to threaten the existence of the euro. In view of this, the Council of Economic Experts recommends that the withdrawal of a member state from the currency union must be possible as an utterly last resort.
But the real punchline here is the council’s take on increased fiscal and economic unity, which it does not support - unless of course everyone cedes their sovereignty to Berlin Brussels, in which case it might be ok.
In consequence, the Council rejects reforms currently being discussed, for example, the creation of a euro area fiscal capacity, a European unemployment insurance scheme, or an economic government for the currency bloc. Making the euro area collectively responsible for potential costs without member states giving up any national sovereignty over fiscal and economic policies would – sooner or later – make the currency union more unstable.
All sarcasm aside, the report highlights the extraordinarily difficult situation which arises when the burden for funding crisis management mechanisms is shared but the fiscal and economic decisions which lead to the crises are not.
Whether or not this is a problem that it's ultimately possible to solve or whether this ill-fated experiment simply needs to be abandoned now before it ends unceremoniously in political coups and popular revolts is something that needs to be addressed sooner rather than later, because as the recent revelations of secret redenomination plots in Greece have shown, the eurozone currently has a date with the wrong side of history.