These proposals, some of which arealready implemented, have their limitations.
TheBU, however useful that may be, poses a problem of size: it opens the door tothe mutualisation of sovereign debts. In fact, if weak banks can prop up theirgovernments and, in turn, be rescued by the European Stability Mechanism, thenpublic debt is mutualized (Mackintosh 2012). This explains why, from 2012, variousministers demanded sovereign debts not to be taken over by the BU. Anotherproblem relates to the supervisory role of the ECB. This role is meant to betechnical since it is based on a precise regulatory framework. It shall notraise questions of sovereignty, legitimacy and democratic accountability(Underhill 2012). Actually, as supervisor of the BU, the ECB bear specialresponsibilities, judging alone the type of intervention, its timing,intensity, duration, etc. to determine whether or not rescuing/closing a nationalbank… these are decisions that cannot be taken without a high degree of legitimacy/democraticcontrol (Otero-Iglesias 2014).
Thefunction of LoLR generated widespread criticism. The first, formulated byKrugman, points to the risk of moral hazard. The action of the ECB may becompared to an insurance mechanism: those ‘insured’ will tend to adoptdangerous behaviors (governments have incentives to issue more debt) because ofthe very fact that this insurance exists. So as to limit moral hazard, DeGrauwe and Ji advocate the separation of the function of liquidity supply fromthat of surveillance. The ECB would pursue its role of LoLR while a differentindependent authority would be in charge of regulating/monitoring the levels ofgovernment debt. A further critique has to do with the fiscal implications ofthis function. Through the massive and potentially unlimited purchase of publicdebt of insolvent countries, the ECB exposes itself to losses in case of issuers’default.
It would then engage all Eurozone taxpayers. Finally,easing the inflation target, as desirable as it is, would translate into q redistributionof wealth which requires, once again, democratic control. In case of higherinflation, the holder of nominal claims would incur losses to their real value(the time value of money declines). There will be a transfer of wealth from themoney lender to the borrower, from creditors to debtors.
Ultimately,the crisis of the euro reveals that any currency is always, and above all else,a social construction. It invites to go beyond a merely instrumental vision ofa currency as a medium of exchange, store of value and unit of account. Money isnot neutral. It is founded on the legitimacy of the values of the communitythat use it, on the trust that economic agents place in the institutions thatissue it.
Money is legitimate because it is a socially-constructed convention.Lakomski-Laguerre and Desmedt (2015) identify three levels of monetary confidence:methodic1, ethical2 and hierarchical(credibility). The latter refers to the ‘subordinate’ relationship with a superiorauthority responsible for setting forth the rules of money use, guaranteeing theirrespect and protecting users in case of violations.
It is precisely this trustwhat is missing in the euro area. The neo-Chartalist current assimilates moneyto a ‘creature of law’ (Knapp 1905): it becomes a legal tender enabling thestate to levy taxes. A political representation, territorial and centralized,is strictly related to this conception. In modern history, it is the state the (sovereign)authority issuing money (Otero-Iglesias 2014). Ingham (2004) says that money existsas a method to (create and) settle debts, starting from the debt of payingtaxes. The establishment of a new monetary space is an element of sovereigntythat is only possible in conjunction with a fiscal circuit. The lack ofpolitical sovereignty condemns any currency area to failure. This thesis isdefended by Otero-Iglesias who considers the solutions proposed by Krugman asineffective insofar as a sovereign supranational state and the associatedEuropean fiscal system are lacking.
This absence makes the EMU a fragileedifice, especially in times of crisis. The BU ultimately implies a fiscalunion. The function of LoLR necessitates a sovereign state at the Europeanlevel having direct redistributive capacities. The number of complaints filed atGermany’s Constitutional Court to judge the legality of OMT, QE, etc. signal theurgent need of said sovereignty.
In this sense, Draghi (2012) acknowledges that’the ultimate goal is political union, a stable and integrated Europe with acommon destiny’. Conclusion’The euro is one of the greatestcatastrophes of economic history’: it is via the comparison of the eurocrisiswith past historical experiences3 that Krugman (2014) comesto this conclusion. It is true that the crisis emerged in an already impairedcontext, to some (De Grauwe 2013) doomed from the start – thereby explaining theineffectiveness of non-standard measures deployed by the Eurosystem since 2012.Far from realizing real convergence4,the region does not qualify as an OCA, lacking essential dimensions5.
There is no fiscal union to stand alongside monetary union. And, most importantly,there are no executive capacities of a full-blown political union. Krugman’s solutions are undoubtedlynecessary, but not sufficient.
As suggested, the real solution is to be foundin the political field, not in the monetary or economic ones. The EMU isdestined to stay on the verge of collapse as long as the region is devoid of acentralized legitimate political authority, one capable of taxing citizens atthe EU level. Should the Eurozone move towards a sui generis ‘gouvernmentéconomique’? The euro is a currency without a country: is the creation of aEuropean country needed for its sustainability? Are Europeans willing to createit? The current state of affairs does not augur well: the handling of thecrisis undermined the legitimacy of the EU which is threatened to succumb tonationalisms. Brexit is only one example of these trends toward nationalretrenchment. There may be bad times ahead.
Still, the word ‘crisis’ in Chineseis composed of two characters signifying ‘danger’ and ‘opportunity’. So, ifevery cloud has a silver lightning, this crisis might be the good chance torelaunch European integration. Will integration proceed through crisis? Onlythe future will tell. BibliographyBlanchard,O., Dell’Ariccia, G.
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)Banking Union for Europe: Risks andChallenges, London:Centre for Economic Policy Research.1 It is based on theorderly functioning of monetary practices (rooted into day-to-day monetaryrelationships). 2 It involves a timedimension, referring to the continuous embodiment of the convention within asystem – which normally includes a central bank (the action of monetaryauthorities must conform to a certain vision of the common good, identified assuch within a given society). 3 Gold Standard andSterling area 1929-1938, Japan 1992-20014 Convergence of underlying productivity levels, unit labor costs,synchronized economic cycles, etc.
5 E.g. low labormobility both between and within MS, low wage flexibility, limited fiscalintegration, i.e.
no supranational system of fiscal transfer / risk-sharing.