Today, Mark Rutte acknowledged that he broke one of his election promises. Right before the elections he said, quite literally, that Greece would not receive another Euro, and that the Greek had to sort out their own mess. Today, a new agreement broke those promises.
Personally, I am disappointed, since I have been a supporter of Mark Rutte since before he became our Prime Minister. When he stated the above, I immediately found it an incredibly stupid promise or statement. I remember thinking that, either, there was more to it than what he said (e.g. an agenda to kick Greece out of the Eurozone), or, that he was ignorant and uninformed (i.e. that his advisors told him wrong things, as seems to have happened more often recently). Today it seems that neither was the case. Not only does his image and that of his party the VVD suffer, but also does this hurt the already very weak public trust for the government.
But this is especially relevant in the case of the current Eurozone crisis. Why? Because it has always been clear (to non-politicians) that the current Eurozone is not a so-called optimum currency area – not even close. Many fundamentals are completely different. For instance, consider productivity levels, unit labour costs, labour unions, interest rates, the structure and health of financial systems, a multitude of cultural factors, etcetera, etcetera. They can all be a source of asymmetric shocks, which would require some kind of mechanism to adjust to them.
Unfortunately, government policies fail to offer such adjustment mechanisms, because they are politically salient and sensitive. There is no labour flexibility that would allow workers to migrate from depressed regions to booming ones. Similarly, there is no fiscal integration, and hence fiscal transfers do not flow from countries that have not been (severely) hit by a certain development to those that have been hit more severely. Internal devaluation, through lowering wages, is not (sufficiently) effective.
This, shockingly, was already known long before the Euro was instituted. See, just to name a few, Barry Eichengreen, Paul Krugman, Luca Antonio Ricci, and Paul de Grauwe. Or to take a clear quote, from before the recent crises hit, from Eckhard Hein and Achim Truger:
It is now widely acknowledged that the structural characteristics of the countries to form the European Monetary Union (EMU) did not meet the conditions of an optimum currency area (OCA) when the euro was introduced in 1999.
Since the Eurozone countries are so different (thankfully – let’s appreciate diversity, of all kinds), shocks will occur. What happened to the Eurozone should not have come as a surprise. Yes, of course, what happened exactly did come as a surprise, but it was always known that asymmetric shocks would occur. Susanne Lohmann realised this already back in 2000: “What is foreseeable is that unforeseen contigencies will occur.” Perhaps what is most surprising is that it took so long for a massive asymmetric shock to materialise.
Politicians have not acknowledged and addressed this, although some may argue that it has been a ‘secret agenda’ to further Europeanisation. Politicians have to make a choice: either go with the Euro, but go all the way, and accept that sometimes a country has to pay for another, and facilitate a greater labour mobility; or don’t, and quit the Euro. This is also relevant because it might very well be the case that a next time, it is not Greece or Spain that needs help, but the Netherlands, or Germany. To refresh memories: also France and Germany had, at times, difficulties adhering to commonly agreed rules.
Politicians should be honest. The Euro comes with costs and with benefits. Costs occur, as they present themselves now, when aid needs to be offered to Eurozone members that are in trouble. But there are also major benefits. Interest rates on government debt, provided that there is indeed solidarity (or a bank able and allowed to print money), have been low. For the Netherlands and Germany, people for instance should not forget that the Euro exchange rate is probably way lower than the respective Gulden– and Mark-exchange rates would have been otherwise, providing a convenient stimulus of exports (the reverse is true for countries like Greece, who compete with countries like China, and are suffering from a higher exchange rate). And there are many more reasons.
This is why Mark Rutte is wrong, wrong, wrong. Be honest. Tell people that being a member of a currency union that comprises countries with entirely different economic structures will result in benefits, but sometimes also in costs. Promising people that there are no costs and that the ‘Greek have to sort out their own business’ may prove to be fatal to the entire Eurozone, when the public, for once, will say NO! And, eventually, when they will say “no”, it is because they have been lied to, not because the Euro is necessarily a bad idea.
I don’t particularly care whether there will be a Euro or not, but make a choice. And stick to it.