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Why Europe’s monetary union faces its biggest crisis
By Wolfgang Schäuble
Published: March 11 2010 19:15 | Last updated: March 11 2010 19:15
Greece has reached a crossroads. For the first time, we in the eurozone are engaged in full
surveillance over the fiscal and economic policy of one of the member countries of the European
monetary union.
Greece’s case admonishes us to draw lessons for monetary union. My thoughts are in no way
directed at the specific measures to stabilise Greece. Nor do they relate to discussions about the
need for a form of economic government to provide improved co-ordination on economic policy
throughout the European Union. My thinking focuses on making monetary union more resilient to
a crisis.
The euro has shown itself to be a reliable anchor of stability in the crisis. It has protected us from
intra-European currency turbulence that would otherwise have aggravated the situation in
Europe. Nevertheless, we in the monetary union now face a decisive moment. The fallout from
the crisis is becoming ever more visible, labour markets in some countries are languishing and
government debt almost everywhere is far in excess of permissible deficit limits. There is only
one course of action: all eurozone members must return to adherence to the stability and growth
pact as rapidly as possible. I underline this message because I have the impression that global
financial markets seem to be speaking far more plainly than many of the voices from the political
sphere.
Grave structural weaknesses have been revealed in some euro area states – weaknesses that
have to be addressed by a long, painful process of adjustment. Economic and fiscal policy
surveillance in the eurozone was insufficient to prevent undesirable trends in a timely manner.
We must therefore make more decisive use of the instruments available. From now on, a
member state with an excessive deficit should not receive EU cohesion funds if it is not making
sufficient savings.
It is obvious that the European body of regulations is still incomplete. Monetary union is
unprepared for extremely severe situations of the type we are now seeing and that demand a
comprehensive intervention to avert greater systemic risks. In the faith that budget surveillance
was effective, the disequilibrium today was held to be inconceivable.
If we wish the euro to be strong and stable on a lasting basis – our condition for bringing the DM
and its high credibility into the euro fold – we have to be prepared to integrate further in the
eurozone. Co-ordination between euro members must be more far-reaching; they must take an
active part in each other’s policymaking.
I understand that a great deal of political resistance will have to be surmounted. Nevertheless, I
am convinced that from Germany’s perspective, European integration, monetary union and the
euro are the only choice. What is decisive is Europeans’ ability to co-operate in partnership to
deal with adversities. For the first time, it has become clear that a monetary union member with
weak economic fundamentals can quickly lose the confidence of global financial markets in an
acute budget crisis. This raises questions about how it would be possible to offer a member state
support and simultaneously avert the threat of default when that country is consolidating its
finances.
Traditionally these are tasks that the IMF has assumed in many crises, and it has produced
strong results. For a member of the monetary union, this approach is not without problems
because a central policy area, namely monetary policy, has been pooled. The involvement of the
IMF is therefore being hotly debated. It is better for the eurozone member states to forearm
themselves for such crises and augment their institutional framework. We could build on
experience gained from use of the EU’s facility for medium-term financial aid to non-eurozone
member states. In May 2009, the funding was topped up substantially on account of the
considerable economic difficulties faced by some central and eastern European member states.
This helped curb the consequences of a crisis.
Eurozone members could also be granted emergency liquidity aid from a “European monetary
fund” to reduce the risk of defaults. Strict conditions and a prohibitive price tag must be attached
so that aid is only drawn in the case of emergencies that present a threat to the financial stability
of the whole euro area. This effect should be further reinforced by excluding the country
concerned from the decision-making process – aid must be the last resort. Political decisions
about aid should be taken in the Eurogroup in agreement with the ECB. Emergency aid could
also be coupled on a mandatory basis with stricter sanctions within the framework of budget
deficit proceedings. Monetary penalties could be imposed immediately and, once the aid and
cooling-off period end, enforced against the member state without any recourse to reclaim the
fine. The prospect of emergency aid connected with hard corrective fiscal action would boost the
confidence of financial markets, thus preventing a deepening of the crisis and obviating the
eurozone members’ need to call upon the IMF in future.
Emergency liquidity aid may never be taken for granted. It must, on principle, still be possible for
a state to go bankrupt. Facing an unpleasant reality could be the better option in certain
conditions. The monetary union and the euro are best protected if the eurozone remains credible
and capable of taking action, even in difficult situations. This necessarily means suspending an
unco-operative member state’s voting rights in the Eurogroup. A country whose finances are in
disarray must not be allowed to participate in decisions regarding the finances of another euro
member. Should a eurozone member ultimately find itself unable to consolidate its budgets or
restore its competitiveness, this country should, as a last resort, exit the monetary union while
being able to remain a member of the EU.
The voting rights of a eurozone member should furthermore be suspended for one year if
infringement proceedings establish that this country intentionally breached European economic
and monetary law. The true extent of the Greek budget disaster only became clear when the
manipulated statistics were uncovered last autumn. I favour the EU statistical office Eurostat
having the right to inspect all public accounts where suspicion of manipulation is substantiated.
Without doubt, it will take a great deal of political willpower to adapt the rules of monetary union
speedily to suit the new realities. Yet there is no alternative to monetary union. There are some
people who might feel that their scepticism towards the euro has been vindicated. They are
overlooking the strengths of Europe and the problems faced in other leading global economic
zones.
Greater calm is needed. The euro is the DM’s equal in terms of stability, there is little inflation
and financing costs are generally low. The euro is now the second most important reserve and
investment currency. A major reason is that financial markets have a great deal of trust in the
ECB. To maintain this confidence, the crisis must be surmounted rapidly. This credibility is
advantageous to the monetary union in overcoming the financial crisis. If we are successful in
putting fiscal policies in the member states back on the right course, the crisis will have brought
about a change for the better.
The writer is the German finance minister
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