Leaving greater scope to financial markets is the best way to achieve the original aims of the euro, writes Niels Thygesen, professor of economics (emeritus) at the University of Copenhagen and a former independent member of the Delors Committee on Economic and Monetary Union in 1988-1989.
The following contribution is authored by Niels Thygesen, professor of economics (emeritus) at the University of Copenhagen and an independent member of the Delors Committee on Economic and Monetary Union in 1988-1989.
"Europe's sovereign-debt problems have prompted a search for more effective approaches to economic governance in the European Union, particularly in the euro area.
Having mounted exceptional efforts, first to provide financing for Greece's adjustment programme, and then to create a safety net for other distressed countries, the European Council established a task force, chaired by President Herman Van Rompuy and composed largely of EU finance ministers, to make proposals for reform.
The Van Rompuy Task Force will submit its final report in October, but we can anticipate its conclusions in the light of the current system's major shortcomings.
At the euro's planning stage, most observers fell into two camps. Some believed that the absence of political union – reflected in the euro's lopsided design, which centralised monetary authority but left budgetary and other economic policies (largely) in national hands – would ensure the common currency's failure. Others believed that the euro itself would trigger political unification.
Neither view has come close to reality so far and it remains unclear whether the current proposals will settle the issue, in particular by clarifying what elements of political union are essential for the euro's survival.
In retrospect, then, the euro appears to have been a hazardous experiment. But the decision to move towards monetary union reflected what seemed most urgent and politically possible at the time: elimination of intra-EU exchange-rate instability, which had dominated the policy agenda for decades.
There was no support for centralising any significant elements of fiscal policy – nor is there today. But such a transfer of authority was not seen back then as necessary for monetary union to work."
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(Published in partnership with Project Syndicate.)