A new lease of life for the euro
It is amazing how perceptions in financial markets can change over a very short period of time. Only a few months ago the euro was being heralded as the greatest achievement of the European monetary union. Then in the last few weeks the inability of...
It is amazing how perceptions in financial markets can change over a very short period of time. Only a few months ago the euro was being heralded as the greatest achievement of the European monetary union. Then in the last few weeks the inability of eurozone leaders to adopt a common front to rescue their ailing banks prompted some currency analysts to ask whether the euro was in fact facing a difficult future.
It now seems that the eurozone leaders have at last come up with a credible rescue plan based on the British model that should allay financial markets' fears about the risks of political inertia in case a major bank collapsed. The advice of Jean Claude Trichet, the European Central Bank president, who was quoted as saying: "It is vital for European governments to have a joint voice, a joint doctrine, and joint principles to deal with the present financial crisis", seems to have been heeded.
José Manuel Barroso used less diplomatic language when, following the inability of European political leaders to reach consensus on a detailed rescue plan for European banks some weeks ago, warned the EU political leaders: "Tempting as it may be, this is not the time for political posturing and grandstanding, for announcing grand initiatives that have no chance of being followed through."
These recent incidents of weak political leadership in the face of international crises that involved many EU countries, have shown that there are some structural flaws in the way the EU manages its financial systems. So what is the fundamental problem that could undermine the future of the euro?
The answer is best summarised in the comments of German officials who, echoing the views of the German Finance Minister Peer Steinbruck, stated just before the recent G7 meeting: "An EU-wide package for the continent's ailing banks would fail because of the vastly different economic and legal frameworks in the EU, the varying severity of the crisis, and possible conflicts in deciding which banks should be saved".
Put in another way, the political leadership of the EU is too fragmented and national issues will always try to prevail over union-wide issues. This is one of the most basic differences between the US and the EU political systems. However shocking it may sound, the EU political leaders just do not trust fully one another.
At least, thanks to the agreement reached in Paris, a major failure has been averted for the time being. While volatility will remain for some time, markets will hopefully welcome this new-found consensus and will start to rebound over a period of time, while the euro will once again challenge the dollar as the world's most important currency.
It is no small achievement to see the leaders of widely diverse economies at last coming up with a common set of rules to ensure that no European bank goes under in this crisis. This does not mean that the distrust that is known to exist among some European leaders will not resurface. The Germans, for instance, had their own good reasons for not accepting the Trojan horse offered by the French and the Italians when they first proposed an EU-wide fund to help ailing European banks. Angela Merkel and her financially conservative Minister of Finance just do not want their taxpayers to end up rescuing ailing banks in the weaker EU countries like Italy, Spain and Greece.
The next several months will be very challenging times for the European monetary union. If the euro is to consolidate its position as the world's favoured currency, the EU leaders must avoid the kind of bickering that has characterised their behaviour for far too long in this current major financial crisis. People who put their trust in the euro will want to be reassured that in a major economic crisis affecting Europe its leaders will act in unison and put the Union's interest before sectarian or national interests.
For small countries like Malta, the adoption of the euro has brought benefits that have more than compensated for the loss of our ability to define our own monetary policy. However, the reality is that political forces on which we have little or no control will in the end decide whether our love affair with the euro will continue to bear fruit in the decades to come. In the meantime let us rejoice that our currency has been given a new lease of life as a result of the political consensus reached by the EU leaders.
It now seems that the eurozone leaders have at last come up with a credible rescue plan based on the British model that should allay financial markets' fears about the risks of political inertia in case a major bank collapsed. The advice of Jean Claude Trichet, the European Central Bank president, who was quoted as saying: "It is vital for European governments to have a joint voice, a joint doctrine, and joint principles to deal with the present financial crisis", seems to have been heeded.
José Manuel Barroso used less diplomatic language when, following the inability of European political leaders to reach consensus on a detailed rescue plan for European banks some weeks ago, warned the EU political leaders: "Tempting as it may be, this is not the time for political posturing and grandstanding, for announcing grand initiatives that have no chance of being followed through."
These recent incidents of weak political leadership in the face of international crises that involved many EU countries, have shown that there are some structural flaws in the way the EU manages its financial systems. So what is the fundamental problem that could undermine the future of the euro?
The answer is best summarised in the comments of German officials who, echoing the views of the German Finance Minister Peer Steinbruck, stated just before the recent G7 meeting: "An EU-wide package for the continent's ailing banks would fail because of the vastly different economic and legal frameworks in the EU, the varying severity of the crisis, and possible conflicts in deciding which banks should be saved".
Put in another way, the political leadership of the EU is too fragmented and national issues will always try to prevail over union-wide issues. This is one of the most basic differences between the US and the EU political systems. However shocking it may sound, the EU political leaders just do not trust fully one another.
At least, thanks to the agreement reached in Paris, a major failure has been averted for the time being. While volatility will remain for some time, markets will hopefully welcome this new-found consensus and will start to rebound over a period of time, while the euro will once again challenge the dollar as the world's most important currency.
It is no small achievement to see the leaders of widely diverse economies at last coming up with a common set of rules to ensure that no European bank goes under in this crisis. This does not mean that the distrust that is known to exist among some European leaders will not resurface. The Germans, for instance, had their own good reasons for not accepting the Trojan horse offered by the French and the Italians when they first proposed an EU-wide fund to help ailing European banks. Angela Merkel and her financially conservative Minister of Finance just do not want their taxpayers to end up rescuing ailing banks in the weaker EU countries like Italy, Spain and Greece.
The next several months will be very challenging times for the European monetary union. If the euro is to consolidate its position as the world's favoured currency, the EU leaders must avoid the kind of bickering that has characterised their behaviour for far too long in this current major financial crisis. People who put their trust in the euro will want to be reassured that in a major economic crisis affecting Europe its leaders will act in unison and put the Union's interest before sectarian or national interests.
For small countries like Malta, the adoption of the euro has brought benefits that have more than compensated for the loss of our ability to define our own monetary policy. However, the reality is that political forces on which we have little or no control will in the end decide whether our love affair with the euro will continue to bear fruit in the decades to come. In the meantime let us rejoice that our currency has been given a new lease of life as a result of the political consensus reached by the EU leaders.