What can you say about a 23-year-old treaty born in Maastricht, the Netherlands that might die? That it was sentimental?
The victory of the Greek leftist party Syriza on Sunday is likely to test the European spirit of collectivism and continued fiscal austerity, and renew spirited debate about the merits of monetary union. Some elements within Syriza are known to favor an exit from the Eurozone.
Established by the Maastricht Treaty of 1992, the Eurozone was originally conceived out of an intellectual longing for one Europe, finally more united and economically focused after a century of war against fascism and Communism. The Eurozone and its currency, the euro, reflected an ideal, originating in some part from Brussels, Paris, and Bonn by civil servants and so-called Eurocrats who were pursuing economic engineering to achieve their vision of a united Europe. This was an emotional and socialistic concept about collectivism — to promote efficient capital movement, trade, and peace.
Further, the euro was envisioned to be an alternative to the U.S. dollar as a reserve currency, providing more funding depth and the issuance of euro denominated sovereign debt. For decades, the Eurodollar market — dollar liabilities on the books of banks outside the U.S. — dwarfed other European currencies, making some of them marginal and maintaining the center of global finance in London.
The euro was also a device to eliminate transaction costs of banking and commerce, estimated at perhaps 0.5 percent on small money transfers in the middle market, or 2.5 percent or more for retail transactions and tourist conversions. Reducing transaction costs is an appreciable savings, especially where net profit margins are thin. Since many suppliers build in a premium if they are being paid in currencies other than their own for whatever negotiated or competitive reasons, one’s imported cost of goods and services is less, as long as everyone buys into the euro concept, which eliminates currency risk.
Ultimately the Eurozone has represented monetary union for nineteen countries of Europe, managed by the European Central Bank, but without political integration. A successful and stable Eurozone would mean that inflation, employment, and social objectives are all the same, which they of course never were — nor ever are. Historically, European countries with lesser export competitiveness due to inflation would see the market depreciate their currencies, helping to maintain their trade. However, the euro is a fixed rate exchange system that prevents needed monetary adjustments.
The Eurozone has implicitly meant that a disciplined, well-managed economy has the same objectives as a poorly managed one. The idealists assumed away the problem: do successful countries really want to subsidize unsuccessful ones by paying for their products in euro or bailing them out if they have issued too much sovereign debt?
There are those in Greece and elsewhere who argue in favor of withdrawal from the Eurozone — to restore national sovereignty and moderate the fiscal discipline required by Germany, the Continent’s largest and most successful economy. Other benefits could be to disenfranchise Eurocrats and to recognize the fundamental competitiveness of the human spirit.
But while monetary union may be a noble although impractical idea, withdrawal from the Eurozone by a country would likely cause global mayhem in the credit and equity markets. In anticipation, European citizens would rush to withdraw their deposits before conversion to local currency. Precipitous withdrawals could cause a run on banks beyond the affected country, and critical interbank liquidity markets would seize up. Further, European companies having debt denominated in euro, the U.S. dollar, or other foreign currencies would be imperiled overnight. Greece itself would begin an economic meltdown. Confidence in other European countries, such as Italy and Spain, would also be damaged — the contagion effect is a “known unknown.”
The world has come a long way since the collapse of part of Wall Street in September of 2008, and the financial terror that ensued. The global banking system has been repairing its balance sheets ever since — we do not need another banking crisis instigated by one country seeking a balance between austerity and social objectives.
If Mozart were alive today, he might be tempted to write a Requiem Maastricht.
