'Irreversible' euro exposed as an illusion

Developments could reshape the landscape of the eurozone, particularly since Greece's exit no longer seems far-fetched. (Aris Messinis, AFP)

Developments could reshape the landscape of the eurozone, particularly since Greece's exit no longer seems far-fetched. (Aris Messinis, AFP)

When the euro was young, then-president of the European Central Bank (ECB) Wim Duisenberg stepped up to receive an accolade on behalf of the fledgling currency.

Accepting the 2002 Charlemagne prize, he channelled the early 20th-century advocate of continental integration, Aristide Briand, saying the success of the single currency both relied on and embodied the solidarity and mutual confidence of the European project. Thirteen years later, with Greece under capital controls and a hair’s breadth from exiting the euro, that idea is close to expiring.

Throughout the region’s debt crisis, current ECB president Mario Draghi has shown a willingness to push the central bank to act as a broad lender of last resort, a bulwark of confidence for a currency he’s said was “irreversible”. Yet he has always sought backing from Europe’s political masters – and that may be precisely the backstop he’s lacking to save Greece.

“The idea was to create an irrevocable monetary union that, once you’re in, it’s forever,” said Charles Wyplosz, professor of economics at the Graduate Institute of International and Development Studies in Geneva.
“The permanence is very much in doubt, especially because you really don’t have a lender of last resort. Under certain circumstances, the central bank can drop you.”

Draghi’s desire for political cover helps explain why he’s trying to strike a balance between generosity and miserliness, allowing emergency loans to Greek banks while warning that they can be cut off at any moment.

On Wednesday, the ECB governing council decided to leave the level of emergency liquidity assistance that it grants to Greek banks unchanged, signalling it intends to wait for a July 5 referendum in Greece over the terms of the European Union-led rescue.

It also left the discounts imposed on collateral the Greek banks present at the current level, according to a Greek official familiar with the discussion. That decision was taken even after the country missed a $1.7-billion payment to the International Monetary Fund that was due on June 30.

A poll on Tuesday cited by euro2day.gr said 47% percent of Greek voters are leaning toward a “yes” vote, supporting the rescue, with those in the “no” camp on 43%.

The turmoil has highlighted how weak a currency union can be when the readiness of the central bank to assist isn’t assured and fiscal backstops are restricted.

“Sovereign countries in the end can always choose to exert their sovereignty,” said William White, an adviser to the Organisation for Economic Co-operation and Development. “The feeling was that, once you are inside, the difficulties in withdrawing would be such that nobody sensible would do it.”

Draghi has made himself perfectly clear about how permanent the euro is supposed to be.

“If one country can potentially leave the monetary union, then this creates a replicable precedent,” he said in Helsinki in November. “The euro is, and has to be, irrevocable in all its member states, not just because the treaties say so but because without this there cannot be a truly single money.”

Yet after more than five months of turmoil, U-turns and mutual recriminations since the election of the Syriza-led government in Greece, the euro is looking rather less irreversible.

Benoît Coeuré, an intellectual heavyweight on the ECB’s executive board, said this week that Greece exiting the euro “can unfortunately no longer be ruled out”. That’s the first time a top policymaker has been so accepting it could happen.

Even one of the founding fathers of the ECB now has a tone of resignation.

“The illusion was, and is, that, having joined the euro, it is irreversible,” said Otmar Issing, the German who in 1998 became the central bank’s first chief economist. “Mutual trust is certainly not there any more and it will be very difficult to restore it.”

Issing argues that, if Greece exits, other countries will have to pull themselves together to make sure it doesn’t happen again. He represents the school of thought, echoed by German finance minister Wolfgang Schäeuble, that says the greater ­danger to the euro is the loss of credibility should the bloc bend its rules too much.

“If the Greeks can get away with the violation of all promises, commitments, then I think it will have a contagion effect on other countries,” Issing said. “Then we’ll be entering into a monetary union very different from what was intended. It will be the end of the zone of fiscal solidity.” – © Bloomberg

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