Memorandum by Jean-Paul Fitoussi and Éloi
Laurent, OFCE/Sciences-po Centre for Economic Research
Is the Euro serving European public goods?
1. The European Union (EU) should aim at
providing European citizens with European public goods. In a pseudo-federal
system like the EU, political deliberation should be about how
to finance and produce the public goods that benefit all European
citizens, and not only member states individually. Sustainable
development is the typical example of a European public good,
but there are many others, some of which belong to the economic
policy domain: macroeconomic stability, full employment, social
integration,...
2. Those European public goods are far more
important to the welfare of European citizens than the scrupulous
observance of doctrinal criteria of budgetary and monetary stability,
which, at their best, constitute intermediary objectives for economic
policy and, at their worse, prevent the final objectives from
being reached.
3. The Euro zone was built in order for
European citizens to benefit from economic sovereignty in a fast-globalizing
world. Because of the doctrinal bias that has presided to the
design of the Euro zone economic institutions, the Euro is in
today's globalization a symbol without sovereignty. As such, it
does not serve well European public goods.
4. Since 1999, the Euro has indeed been
"strong" when the economy was "weak" and "weak"
when the economy was "strong" (see Figure 1). In order
words, the Euro exchange rate has destabilized the Euro zone economy
instead of contributing to stabilize it.
Source: OECD.
5. While the consequences of the chaotic
European monetary system were logically negative for European
countries, one could reasonably hope that the creation of the
single currency would give the Euro zone economy a true monetary
sovereignty. It has not been the case so far. Yet, the major difference
between the respective history of the ECU's and the Euro's parity
is that the former was a currency basket: no one was responsible
for its fluctuations. So one would have hoped that this would
not be the case with the Euro, which was born out of a coherent
political project backed by a strong institutional framework.
6. The priority has clearly been given since
1999 to price stability over exchange rate stability (with an
undeniable success, as shown on Figure 1) in the Euro zone. The
activism of the European Central Bank (ECB) on the Forex market
has been asymmetric: it intervened when the Euro depreciated (threatening
price stability), but not since it has appreciated.
7. It is thus clear that the Euro is not
only a currency without a State, but a currency without sovereignty.
It is not governed because it has been de facto put under
the sway of an independent authority whose conviction is that
the Euro zone should not have an exchange rate policy. On the
contrary, one can make the argument that the Euro zone economically
needs an exchange rate policy and is legally entitled to it.
8. European law, on this point ambiguously
unambiguous, gives the share responsibility of the exchange rate
policy to the ECB and the Council. The ambiguity runs both ways:
the Council can formulate general orientations for the exchange
rate policy but must respect the ECB lexicographic order (price
stability is first, then comes the rest, Article 105 of the EUT)
and the ECB, submitted to this order, must support those orientations
when they are formulated (Article 111).
9. More precisely, since, as the ECB itself
puts it, the "ultimate responsibility" for the exchange
rate policy lies with the member states, a distinction must be
made between independence of means and of objectives. The ECB
appears to be independent in terms of the means chosen to achieve
the general objective set by the Council. But these objectives
have to be discussed between the Council and the ECB. And these
objectives and that of price stability have to be compatible.
The exchange rate policy is thus (although somewhat tortuously)
unambiguously a shared competence between the Council and the
ECB.
10. Instead of conforming to this institutional
framework, the Euro zone members states have opted for the bizarre
creation of the Eurogroup, the informal gathering of Euro zone
economic and finance ministers, which has been created in 1997
with no legal basis to "dialogue" with the ECB.
11. Apart from the regional pro-cyclicity
mentioned above, the consequences of the non-exchange rate policy
of Euro zone are twofold. At the regional level, it reinforces
spurs for member states to engage in social-tax competition. The
case of Germany since 2000 is spectacular in the respect. Since
the nominal exchange rate is intangible and the common exchange
rate policy non-existent, member states are encouraged to develop
their own individual exchange rate policy through their social-tax
compact (ie their real exchange rate policy). This creates a "new
European competitive disinflation" detrimental to the least
competitive member states and, more importantly, to European growth
and cohesion.
12. At the global level, the Euro zone is
only an involuntary player in the international monetary system,
through the derivation circuit played by the Euro with respect
to the dollar. But the Euro can thus be said to serve as the adjustment
variable to global imbalances. Without an exchange rate policy
of the Euro zone, movements of the exchange rate of the Euro simply
reflect the exchange rate policies of the rest of the world. If
the dollar was to brutally depreciate, as it could easily do,
the Euro zone would face a situation of crisis without a crisis
management mechanism.
6 April 2007
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