Exiting the eurozone is not an option

The possibility that one or more countries might exit the eurozone was until recently a taboo subject among European leaders. But it burst into the open in the angry response of Nicolas Sarkozy and Angela Merkel to the Greek prime minister’s proposal for a referendum on the bailout plan: what the Greeks must vote on, they demanded, is whether to stay in the euro or get out. Soon after, Ms. Merkel’s party passed a resolution calling for countries “unable or unwilling” to meet the rules to “voluntarily” exit. As the crisis has deepened, such talk has grown louder – with think tanks churning out papers on the subject, and businesses factoring it into their long-term contingency planning.

But let us be clear: this would be a disastrous outcome. It would be financially ruinous for the exiting country – and do not for a moment believe that an exit under the kind of pressure Greece is now under would actually be “voluntary.” Moreover, it would also be a tragic defeat for the eurozone as a whole, in that it would signify the end of the project of Economic and Monetary Union (EMU) as originally conceived.

Two key conditions

Two key conditions of eurozone membership are often forgotten. First, all EU members are required to join the common currency. Second, once joined, membership is irrevocable.

The fact that not all EU countries are in the euro (it now stands at 17 of 27) tends to leave the impression that membership is either for a select “club” of states, or a policy option which each EU member may adopt or refuse. In fact, euro membership is neither a privilege nor a choice; rather, it is an obligation. And it is an obligation that applies as much to Greece and Italy as it does to Germany and France.

When designing the single currency, European leaders specifically chose one with obligatory membership – rejecting other possibilities, such as a general opt-out or a “parallel” currency. There was both an economic and a political rationale for doing so. The widest possible circulation of the single currency would maximize its economic benefits such as increased cross-border trade, and would give it greater weight in the world economy, potentially rivaling the dollar as a global reserve currency. Moreover, it would cement the ties bringing EU countries together into a nascent political union. Eurozone membership was made irrevocable for the same economic and political reasons.

This obligatory aspect of EMU is obscured by the fact that two countries, the UK and Denmark, have a formal opt-out from the duty to join the single currency – although even these two are otherwise part of EMU and are obliged to support its goals. All other non-eurozone countries (with the exception of Sweden) are new EU members that have not joined because they have yet to comply with the economic “convergence criteria.” (Sweden remains out on the technical argument that it still does not meet one of these criteria – membership in “ERM-II”)

Obligations

Of course, there are other obligations attendant on euro membership besides those to join and to remain in. The Stability and Growth Pact requires members to maintain low deficits and debt. Indeed, many of the currently struggling members – Greece in particular – are in serious breach of these rules. Yet most members have fallen foul of these at some point, including France and Germany. In truth, just as all members benefit from the single currency, so also it imposes a web of obligations on all members, those in good standing and delinquents alike.

The apparent permanence of the single currency was part of what made it a success in its first decade, 1999-2009. European leaders could have created a monetary union simply by locking together the exchange rates of existing currencies; instead, in 2002 they introduced new euro-denominated notes and coins and physically destroyed the old ones, precisely because doing so made it seem impossible to go back.

Of course, nothing is permanent in this world, and so it is more than a theoretical possibility that a country could leave the euro – although it would likely also have to leave the EU as well. But if that were to happen, the original terms of membership would be broken, and not just for the exiting country: every member’s status would be called into question.

Now we are seeing how even the threat of a eurozone breakup weakens all members. Not just “peripheral” members such as Greece and Italy but those in the “core” – Belgium, Austria, Finland, France – are finding themselves under pressure. Even Germany, which until recently had actually benefitted economically from the crisis, is now feeling the pinch.  

Self-defeating and wrong

It would be both self-defeating and wrong to attempt to save the eurozone by expelling one or more of its delinquent members. It would be self-defeating because it would undermine the foundations of the entire project, which is based on a political and economic logic of irrevocability. And it would be wrong because it make every member’s position insecure, transforming a community of trust into one of fear.

Once the exit option is ruled out, then all members of the eurozone – indeed, all EU members – can get down to the business of actually fixing it. As many commentators have argued, what this requires is that the European Central Bank must fulfill the role of lender of last resort, and there must be some centralization of fiscal authority that includes a mechanism for the pooling of risk, such as “eurobonds.”

To achieve this will require something that has been little in evidence in this crisis: a sense of solidarity. After all, a bond is more than a financial instrument. It is a tie that binds.

 

By Ian Cooper