A biased Controversy over Austerity overshadows the European Debate!


It is now time for both Truth and Transparency.


There are an increasing number of voices claiming that current austerity policies be abandoned because they create a vicious circle killing off an already weak recovery and leading to increased budget deficits and indebtedness that they are supposed to reduce.


The reasoning is supported by successful stimulus programs carried out after the crisis, in particular the spectacular recovery in the United States and to a lesser extent in the United Kingdom. After tolerating record budgetary deficits and following policies of extreme monetary accommodation, including the use of unconventional measures (QE), the USA and the UK are enjoying a period of strong economic growth and significant decrease in unemployment. Their currencies are strengthening on FX markets, in particular in relation to the €.


Is such a scenario transposable to the Member States of the Eurozone and does it justify that “Europe changes its policies”? Should one challenge the agreements concerning budgetary discipline and limits on indebtedness accepted unanimously which justify the maintenance of the economic and fiscal sovereignty of members and underpin the viability of the single currency?


The answer is clearly NO! The current stalemate is the result of the simultaneous existence of “national” sovereignties which have been amputated of the instruments of monetary policy on the one hand, and of a “European” sovereignty deprived of necessary budgetary, fiscal and borrowing capacities on the other. This absurd state of affairs is the direct consequence of the failure to complete the Economic and Monetary Union.


In the USA and the UK (as well as in all countries having retained their full monetary sovereignty), it is at the level of the federal/central governments that stimulus programs have been implemented, relying on a close coordination between the political authorities and the central bank of the country in question. In the USA one abstained from any purchases of State issued securities relying entirely on the federal government and the banking system to redistribute the massive amount of liquidity injected into the system.

Within EMU, on the other hand, there is no executive body that can act as an operational partner of the ECB. A direct bilateral dialogue between the Member States and the ECB is not conceivable because of the moral hazard risk that would entail, as evidenced by the fierce resistance of Germany to the implementation of quantitative easing measures within the Eurozone. The ECB will limit its interventions to the purchase of privately issued securities, the outstanding amount of which is insufficient to have a significant impact and will refrain – at least for the time being – from acquiring any sovereign debt securities of Member States. One should remember that activation of the OMT program that would authorise such purchases is subject to the prior negotiation of a national recovery program with the Union.


During the first phases of their respective recovery programs, the USA and the UK had no qualms about letting their currencies depreciate, an option that is not available within EMU. One should also not exaggerate the importance of the exchange rate in arguing for less austerity for several reasons: first of all a significant amount of the “exports” of EMU Member States are directed to other members of EMU eliminating the exchange rate factor; secondly, the “devaluation” of the € leads to an increase of the price of imports, in particular commodities that are indispensable in the production of many of the products consumed within the Eurozone and which wipes out a significant portion of the devaluation’s benefits. The recent fall in the value of the €, however welcome it may be, will only have a very marginal effect on the area’s competitivity. The latter is far more tributary to qualitative factors which, as is the case in Germany, allows to absorb a higher level of “social charges” while remaining fully competitive.


When the single currency was created, participating Members transferred their monetary sovereignty to the ECB, depriving them of the “external” devaluation tool.  Simultaneously, as a quid pro quo for retaining budgetary and fiscal sovereignty, they agreed to submit themselves to a freely accepted collective discipline which took initially the form of the “Stability and Growth Pact”. Successive violations led to its progressive reinforcement and finally to the Budgetary Treaty (including quasi mandatory sanctions) and the implementation of a mandatory budgetary process: the “European Semester” that subjects national budgetary exercises to supervision and validation by the Commission.

It is the obligation to abide by these rules that is currently being challenged by France (with Italian support) by invoking “exceptional circumstances” to justify a request for additional time to conform to previously subscribed commitments. France is desperately trying to escape the hardships involved in implementing “internal devaluation” measures that she had imposed with scant soul searching on Greece, Portugal, Ireland and Spain as the price for the Union’s and the IMF’s financial support at the height of the crisis. Having bowed to these demands and enjoying finally the first positive results of their efforts, it is hardly surprising that these countries are aligning themselves on the German and Northern European countries demands that France and Italy undertake at last the necessary reforms to ensure the survival of EMU.


In this situation the citizen is faced with a clear binary choice that needs to be fully explained in terms of their respective consequences:


Either a full restitution of monetary sovereignty to the Members of the Eurozone which entails the dismemberment of the single currency.


Or, the completion of EMU’s unfinished structure by conferring upon it a significant budget, corresponding fiscal resources and an autonomous borrowing capacity.


As long as a choice is not finalised the crisis will simmer alternating like a volcano between periods of latency and eruptions.

Both options benefit from the support of eminent personalities in the economic, social  and political fields.


Thus, the option of dismembering the Euro, advanced by François Heisbourg or more recently by Eric Zemmour, as well as by many highly regarded economists (who have questioned right from its inception the viability of the single currency) serves not only to underpin the simplistic fantasies of the French National Front or the German AfD but also reinforces the credibility of politicians from all persuasions who are demanding a “change in Europe’s policies” and the shelving of austerity.


On the other hand, the option recommending the completion of EMU received recently the support of President Valery Giscard d’Estaing in his latest book “Europe’s last chance” and is also defended by most of the personalities that have taken the trouble to evaluate objectively the economic, social and political costs of the Euro’s dismemberment in comparison to the efforts that EMU’s completion require.


There can be no doubt that re-appropriating monetary sovereignty at national level would give greater flexibility to the economic policies pursued by individual EMU Member States and would sit well with the currently popular nationalistic and populist trends. However, the price to pay would be very considerable: not only would each of these countries become inaudible on the international stage when their interests are being challenged but, first and foremost, an economic catastrophe of unheard proportions would spread beyond the Eurozone to encompass all 28 Union Members, if not the entire global economy.


This is not an exercise in scaremongering but rather an attempt to consider with a cool head the consequences of unwinding the single currency: it is totally illusory to believe that it could be achieved through a straightforward negotiated process mirroring the one painstakingly achieved at the time of its introduction. From the moment financial markets would believe that such an alternative was being considered, a strict and immediate exchange control regime would have to be introduced to avoid massive private capital flight (only a few computer clicks away) transferring funds to more stable jurisdictions either within the Eurozone such as Germany but, more likely, further afield and in particular towards the United States. The implementation of such measures would instantly signify the implosion of the single currency.


Simultaneously, the question of executing all Euro denominated contracts would be raised in accordance with the principle of the “continuity of contracts” which allowed initially the smooth transition of contracts denominated in each of the “tributary” currencies towards Euro denominated ones. Applying this principle when “exiting” the € would generate a cascade of defaults both for States whose sovereign debt are denominated in Euros as well as for private companies who have both receivables and payables denominated in €. Imposing the conversion of the Euro into the new “national currency” would be tantamount to default, at least as far as foreign creditors who are not subject to the jurisdiction of the State in question. Whatever arguments may be advanced to underpin a legally enforceable “requalification” of the currency of execution of outstanding contracts, it is clear that either creditors or debtors would suffer untold losses that, through a process of contagion, could bring down the entire financial system.


A third and similarly problematic area of concern resulting from a return to “national currencies” would be the capability of the States to finance their public debt, in particular for those who would have opted to re-denominate arbitrarily their debts in their new currency. International markets would remain closed to them which for countries like France would be catastrophic as over 50% of its sovereign debt is in the hands of foreign investors. Interest rates, whose current low level is presented as proof of investor confidence, would soar making debt servicing unsustainable and aggravating budget deficits commensurately. All the conditions for initiating a vicious inflationary circle would be in place leading to the uncontrollable depreciation of the new currency and to the ruin of small savers and increased hardship for the most vulnerable members of society.


The hope would be that, after the collapse generated by the Euro’s implosion (on a scale at least comparable to the crisis of the 1930’s followed by WWII), one could start rebuilding a safer and more stable society. For that to happen one must bet that in the interval social and political unrest have not wiped out the very foundations of European democracy. There is a high risk of political upheaval putting in the balance the survival of the European social model so hardly fought for after bringing down both the fascist and communist regimes that flourished during the 20th. Century and whose appeal seems sadly to be growing once again..


 In contrast with this Armageddon scenario, there can be no doubt that the efforts needed to complete EMU, including painful structural reforms (internal devaluations) would be far more bearable for the great majority of the population.


There is no time left for procrastination: there is no third way! Those that recommend reverting to national currencies should be prepared to assume the consequences and have the honesty to inform appropriately the audiences they address. Those who would rather give a new impetus to European integration should push for the Union to be given the competencies and the resources needed to make it one of the world’s most prosperous regions. They should also gather the courage necessary to confront their detractors and make them face their responsibilities.


Lorgues, 10th October 2014



Paul N. Goldschmidt

Director, European Commission (ret.); Member of the Steering Committee of the Thomas More Institute.










Tel: +32 (02) 6475310                                 +33 (04) 94732015                         Mob: +32 (0497) 549259

E-mail: paul.goldschmidt@skynet.be                                            Web: www.paulngoldschmidt.eu