Is It Time to Rethink the Euro?

European leaders are exasperated. Late last week they met for the tenth time in just 18 months and agreed to yet another package to rescue their troubled economies, but their efforts have once again failed to resolve the crisis.Despite an initial rally, the plan did little to calm the markets. In fact, yields on Spanish and Italian bonds—the real existential threat to the euro zone—actually rose. Perhaps it is time to consider a new approach to the European debt crisis.Nearly everyone agrees that having a single currency in Europe would be preferable. The question no one seems to ask is whether or not the single currency is actually worth the cost. Does the European Union need the euro?First, is the euro worth it? The expense of supporting the euro is considerable and growing. The stronger EU countries have now poured €372 billion on the fires of Greece, Portugal, and Ireland. Moreover, the European Central Bank (ECB) accumulated over €550 billion in exposure to these countries during its efforts to support them. If peripheral countries default, the ECB, with only €81 billion in reserves, will need to be recapitalized by EU taxpayers at an enormous cost. The euro is also a burden on the weak economies themselves, which, lacking a flexible currency, are struggling to maintain competitiveness .Now for the benefits. The euro has been successful at providing macroeconomic stability and freedom from currency speculation. (Although, the latter now seems to have only been exchanged for financial crises and speculative attacks on sovereign debt.) However, the reality is that the euro has failed to deliver in many respects. For one, studies have shown that, despite high hopes, the euro’s impact on trade and investment has been lackluster [PDF]. Second, research has shown [PDF] that the euro has had a minimal effect on lowering exchange rate risk for firms—another touted benefit of the single currency. Third, the low interest rates once seen as a benefit of a common currency are now more of a burden, having fueled unsustainable booms on the periphery and allowed fiscally irresponsible governments like Greece’s to spend beyond their means.In short, the cost-benefit analysis does not appear to be in the euro’s favor. But before we consign the euro to the dust-bin of history we must ask: if the euro is scrapped, would that mean the end to the European project and the hard-won benefits of the common market?If the European project is narrowly defined by Maastricht treaty that created the European Union, then the answer is yes; the treaty and the euro are irrevocably joined. However, if viewed more broadly—as the free movement of goods, services, people, and capital—then there is no reason that the end of the treaty needs to end either the European project or the European Union. Europe could write a new treaty which joins EU members into a common market without the single currency. Such a treaty would permit many of the best elements of the Maastricht treaty to survive—visa-free travel, the unified labor market, and the harmonization of product standards and legal codes.In fact, this is exactly the world that countries like Britain, Denmark and Sweden have been living in for over a decade. None of these countries adopted the euro but have had been fully integrated into the common market and its institutions. There is no evidence [PDF] to suggest that they suffered from this choice.The point is not that getting rid of the euro would solve all of Europe’s problems. It is that the experience of these countries demonstrates that the single currency and the single market are distinct. In other words, it is possible to have one without the other. Their experience also illustrates another model for the euro: It could be maintained among a core bloc of strong countries—such as Germany and the Netherlands—with other EU members pegging their currencies to the new euro just as Denmark currently does to the existing euro.There is no doubt that the euro has been a magnificent accomplishment, but this should not blind Europe to its limitations. Peripheral countries are suffering under the weight of the restrictions that the common currency imposes, and the core countries are feeling the political consequences of their efforts to promote fiscal federalism—which their voters are deeply suspicious of. A new treaty would alleviate these strains and still salvage the undeniably successful single market. This is certainly not the only way forward for the European Union, but, with European policymakers acting as if the choice they face is between the euro and the abyss, it is important to recognize that there is another option.

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