Today’s European Union, today’s Europe, in the aftermath of the Great Recession and Brexit, is a club lacking vision and direction. The establishment of the Eurozone as a Robert A. Mundell’s optimum currency area would require more economic, political and social integration. The Euro, arguably a common currency with winners and losers, should not be left undone, but concluded. Europe needs more cohesion and integration, but the absence of a grand plan, of a vision is undermining its very own ability to take advantage of the ongoing crisis. Every crisis is also an opportunity.
As the European Union and the Eurozone continue to expand -now a process literally halted in spite of promises from Brussels- alternative routes will have to be explored. Regional integration could and should emerge before continental integration takes place. In particular for the six Balkan republics which still have not joined the European Union, regional integration, meaning radical integration with one another, would bring about far more powerful and immediate benefits that integrating the larger, more distant European Union.
Robert A. Mundell, Columbia University Emeritus Professor of Economics and Economics Nobel Prize Winner in 1999, is the father of the Eurozone or “optimum currency areas”, a theory he presented in his 1961 paper. The Eurozone, because of its diversity and relative lack of political and social integration, is still today far from being an optimum currency area. There is little doubt that the six Balkan republics of Albania, Bosnia Herzegovina, Kosova, Macedonia, Montenegro and Serbia, represent today the World’s most cohesive “opmimum currency area” where a common currency not only could but also should be, manifestly, embraced. I will explain the benefits hereafter.
The drama of Europe’s small republics, particularly the poorer ones, and opposite to U.S. states, is that they continue to run whole Administrations as if they were relevant nation-states, showing an inability to devolve, to outsource part of the national governance to more senior levels, supranationally, to what would be in the U.S. the federal government. Fostering regional integration in the Balkans and other regions of the World would bring about phenomenal benefits in the form of savings through resource pooling, elimination of barriers and borders, identification of synergies and economies of scale, better coordination and harmonization.
The six Balkan republics are clustered in every indicator when looking at the World rankings: per-capita income, GDP growth, inflation rates, unemployment, yet each small republic because of historical reasons, still chooses today to run whole Administrations in spite of the explicit evidence to embrace radical integration, regionally. Six Balkan republics running six Central Banks and six different currencies is, to say the least, an irrational and absurd policymaking decision. Past warfare and current ethnic rivalries which have perpetuated for centuries, can no longer justify a political elite’s myopia. The six Balkan republics are today Europe’s laggards. A recent ranking of the World’s best countries conducted by U.S. News, put Serbia last in the ranking at position 80th, the other five Balkan republics being unaccounted for do not make it to the World’s top 80. Albania is Europe’s hungriest country according to the World Hunger Report 2017. Only Moldova and Ukraine are behind. Six countries with an aggregate population of under 20 million could be administered as efficient as a U.S. state, with one and only capital, one and only foreign policy, one and only Central Bank. The local elites, the local status quo, embracing a rhetoric of absurd patriotism and national interest, are merely maintaining an incompetitive advantage they no longer deserve. Money spent unnecessarily and inefficiently running local Administrations should be devoted to deficient vital public goods such as healthcare and education.
The opportunity to establish a common currency for the Balkans is in Europe’s best interest. Four additional countries which still have not joined the Eurozone could join The Balkoin, namely Bulgaria, Hungary, Romania and Greece, the latter avoiding a Grexit from the Eurozone and eventual return to the dracma, with dramatic consequences for everyone.
There are only four currency unions in the World, namely the European Union, the Eastern Caribbean Currency Union and Africa’s two based on the West/Central African Franc and the Rand. For Alfred Schipke, co-editor of the 2013 book “The Eastern Caribbean Economic and Currency Union: Macroeconomics and Financial Systems”, running a currency union has significant advantages:
1/ In terms of the benefits, the small size of these countries means that the currency arrangement allows them to take advantage of scale economies. It also allows them to diversify risk. This means that if one country gets hit by an external shock or natural disaster, the other countries can pool resources and deal with the shock more effectively.
2/ Again, because of their size, these islands can provide, at the regional level, more cost-effective public services. So that is a major benefit. What also matters a great deal is when the union speaks with one voice the countries can be better represented at the global level.
In the case of the South Africa’s currency Rand, the small land-locked nation-states of Lesotho and Swaziland waive the efficient management of the monetary policy to a larger more seasoned Central Bank, eliminating foreign exchange risk and fostering an easier trade with currency union members South Africa and Namibia.
Columbia University Economics Professor Joseph Stiglitz has underscored in recent years the dangers of the Eurozone. In his 2016 piece published on The Guardian “The problem of Europe is the Euro” he stresses:
A single currency entails a fixed exchange rate among the countries, and a single interest rate. Even if these are set to reflect the circumstances in the majority of member countries, given the economic diversity, there needs to be an array of institutions that can help those nations for which the policies are not well suited. Europe failed to create these institutions.
It is never late to create these missing Institutions, I would reply to the Columbia economist, in fact I plan to create them. Recently relevant experts have suggested the creation of a second Euro, perhaps “the weak one”. For instance in his 2014 piece published on VOX “Why Europe needs two euros, not one”, Jacques Melitz reviews the advantages of such an arrangement:
1/ First, the second euro could be constructed in a better manner than the previous euro from the discontented members’ point of view. There is no need to repeat the errors of the past.
2/ The second argument comes in two parts. First, the creation of a separate monetary union by the discontented members would bring them exchange rate adjustment relative to Germany, which is the single most important exchange rate adjustment that they need. Second, by forming a second monetary union rather than reverting to separate currencies, they would still avoid the problem of competitive devaluations that hounded the earlier EU after the breakdown of Bretton-Woods and up to the appearance of the Maastricht Treaty as a possibility on the horizon in 1986 (when the Single European Act came).
3/ Thirdly, there are strong indications that the discontented members of the Eurozone will get a worse deal from the movement towards reforms of the system that is now proceeding with grudging German approval than they would by forming a second euro.
The creation of a second Euro is also supported by Professor Joseph Stiglitz who writes on the Financial Times “A split euro is the solution for Europe’s single currency”, pointing out:
It is important that there can be a smooth transition out of the euro, with an amicable divorce, possibly moving to a “flexible-euro” system, with say a strong Northern Euro and softer southern euro. Of course, none of this will be easy. The hardest problem will be dealing with the legacy of debt. The easiest way of doing that is to redenominate all euro debts as “southern euro” debts.
A breakout of the current Euro along a northern/southern axis seems unlikely, radical proposals coming from France’s Marine Le Pen or from Italy’s Beppe Grillo advocate in favor of leaving the Eurozone altogether. Provided many Eastern European countries have still not joined the Eurozone, a divide western Euro and eastern Euro seems more plausible. The eastern Euro would of course be denominated “the Balkoin”.
Mexican economists Edgar Juan Saucedo Acosta & Jesus Diaz Pedroza are the co’authors of the book chapter “Theory of Optimum Currency Areas and the Balkans”, proposing that the Balkan countries choose one in three strategies:
We propose to evaluate the relevance for Balkan countries choose one of the following three options: keep their national currencies, create a new regional currency or to use the euro (Euroisation or to be part of the euro area).
The optimal strategy is to create a new regional currency, while following Robert A. Mundell’s manifesto to create a fully operating optimum currency area, requiring full integration at the economic, social and governance levels (1961):
In the real world, of course, currencies are mainly an expression of national sovereignity, so that actual currency reorganization would be feasible only if it were accompanied by profound political changes. The concept of an optimum currency area therefore has direct practical applicability only in areas where political organization is in a state of flux, such as in ex-colonial areas and in Western Europe.
The Balkans, historically source of more history than they can consume in the words of Winston Churchill, represent today an area of foreign policy concern for the European Union and the United States, which are rather intruders trying to preserve a stake in the game than to become true advocates of more integration and prosperity. The Wall Street Journal identified in 2017 the Balkans as “Europe’s Next Crisis”, with interference from Russia, Turkey, besides the European Union and the U.S. The Balkans need more integration, not more divide along East and West fostered by wannabe superpowers still playing a Cold War dynamics.
The immediate question, if the Balkoin is created, is whether Bulgaria, Hungary and Romania should join the Euro or the Balkoin. Jacques Melitz’s three above reasons would suggest the latter as a better option, maintaining a flexible exchange rate with Europe’s industrial core may prove more competitive on the long run. Improving the institutional building of the Eurozone and the European Central Bank may also be a plus. Sharing a common currency with an important number of trade partners from the region could prove crucial. The Balkoin, if embraced by six Balkan republics, plus Bulgaria, Hungary and Romania, could also foster student exchanges and labour mobility, more international trade and reciprocal foreign direct investment. It built more successfully than the Eurozone in could show other emerging regions a path forward towards embracing a common currency. Capitalism in the Balkans is crony, labor market deficient, a better run economic system is a prerequisite for job market enhancement.
Greece’s delicate debt crisis has, thus far, only contemplated two options: staying in the Eurozone, with the related burden of Greece’s deteriorating public finances and an increasingly unsustainable level of public debt, or the exit towards a new dracma which is nothing but a time bomb.
Greece’s debt crisis could be resolved, if Greece was to join the Balkoin, for the following reasons:
There is an oversupply of policymaking and an insufficient supply of creative vision. The former cannot thrive in the absence of the latter. The latter requires the former to take off. The best possible future beyond imagination awaits, around the corner: the only prerequisite is, let be reminded, that of radical regional integration, then World integration and removal of all barriers, borders and tariffs.