At the inception of the euro, many economists warned about the economic dangers of having a single currency for the entire continent. The problem they foresaw is that having a single currency means having only a single monetary policy for an economically variegated set of countries. Warning about such a problem, Harvard economist Martin Feldstein wrote in 1997 that disharmony would be “exacerbated whenever the business cycle raised unemployment in a particular country or group of countries. These economic disagreements could contribute to a more general distrust among the European nations.”
Is it time to go back to what was?
Even now, many economists note that the return of the German mark would solve many of the economic problems the eurozone now faces. Its reintroduction would make it possible to have stimulative monetary policy in the rest of the eurozone, or supportive monetary policy for the very necessary structural reforms in the south, without causing inflation in Germany. Also, as the reintroduced mark inevitably appreciated relative to the shrunken euro, the real value of the debts that are causing so much trouble would be reduced in a graceful way that would not require rewriting thousands of legal contracts. And unlike the reintroduction of the Greek drachma, for example, there would be no great incitement to financial contagion. Also, no more awkward visits and justification speeches by European Central Bank chairman Mario Draghi in Berlin.
To be sure, some adjustments would be necessary, namely in the German export sector. Maybe some German banks with lending in the south will have to recapitalized. There may be distributional issues in German pension funds that were engaged in the South. But we believe this to be manageable.
So the technical economic problem might have an easy solution. But the reintroduction of the mark would leave a political and cultural conundrum that the euro was originally supposed to solve: how to provide a symbol of European unity that binds Germany tightly into the rest of Europe, not only in the current generation, but into our great-great-grandchildren’s time. Money has too many practical ramifications to be a good symbol of unity. When the limitation of having only one monetary policy for the whole eurozone causes the economic troubles it was bound to cause, divisions between nations are highlighted and intensified, not muted. Europe needs a better symbol of unity than the euro.
We have no foolproof idea for what an alternative symbol of European unity might be. And we doubt economists are the right people to come up with such a symbol. A European manned mission to Mars, unmanned mission to the seas of Europa, or a new supercollider surpassing CERN’s Large Hadron Collider appeal to us, but we doubt they would have enough symbolic power by themselves. We do know that all of these put together would be much less expensive than keeping the eurozone as it is now.
What we hope to accomplish is to alert those in Europe who could come up with a brilliant symbol or symbols of European unity that what Europe faces is not primarily an economic problem—it is a problem of meaning. The economic problem has a technical solution. But it is likely that non-economists will come up with the solution to the underlying need for a powerful symbol of European unity and German commitment to Europe that is less problematic than the euro.