Europe is home to many languages, diverse geographies, and different cultures. And it's also where, until recently, almost every country had its own currency.
The arrival of a common currency in 1999 changed everything. Currently, 344 million citizens of 20 of the 27 EU member countries use the euro, making it the second most used international currency in the world after the US dollar. Masu.
One of the purposes of the euro is to simplify cross-border payment transfers between euro area member states. This will be achieved using a system called “Target 2” (T2), which settles private sector interbank transactions and commercial transactions between EU countries.
However, my research shows that this seemingly innocuous payment system has been effectively used to prevent the eurozone from collapsing.
The problem is that some euro zone member states (such as Italy and Spain) import far more than they export from other member states, particularly Germany, the economic engine that has sustained the euro zone economy since 1999. Thing.
As a result, a trade deficit may occur and the trade balance may become negative. And this creates a debt that Italy and Spain owe to Germany.
But fortunately for them, T2 converts this potentially risky debt into a seemingly risk-free loan owed by the central banks of Italy and Spain to the German central bank. The problem is that T2 has no legal obligation to make repayments.
United over debt?
Part of the reason for this imbalance is that the euro area does not meet the economic conditions to become an “optimal currency area” (OCA), a geographic region in which a single currency and monetary policy can operate in the long term. It is in. (as opposed to, for example, the UK or the US).
Different business cycles within the euro area (some countries are booming, others are sluggish) can lead to higher trade surpluses and deficits due to the inability to change exchange rates between regions means.
The usual way for countries to deal with trade deficits is to devalue their currencies, but this is not possible in the euro area because exchange rates among member countries were permanently fixed in 1999. The most efficient countries, such as Germany, are running surpluses. Meanwhile, more inefficient countries such as Italy and Spain are racking up deficits.
To correct this, surplus regions need to be recycled into deficit regions through transfers in order to keep the euro area economy balanced. This is what happens in OCAs like the UK when the central government transfers tax revenue collected in England to Scotland, Wales and Northern Ireland to correct regional imbalances.
However, Germany, the euro zone's largest surplus country, rejects the idea that the EU is a “transfer union”. This is because the euro area was founded on the clear basis that market forces, rather than fiscal transfers, would be used to eliminate productivity gaps between member states, and Germany would This is because they had decided not to provide subsidies.
But deficit countries, including Italy and Spain, are using T2 for this very purpose. For them, T2 has effectively become a giant credit card. However, unlike a regular credit card, you don't have to pay back the debt or the interest that accrues on the debt.
The silent mountain of European debt
My research also shows that the scale of the deficits that are accumulating has caused citizens in those countries to lose faith in their banking systems and send money to banks in surplus countries. T2 is used to facilitate capital flights to Germany, the Netherlands and Luxembourg.
Yavuz Meyvesi/Shutterstock
Additionally, there is the fact that member states do not control the European Central Bank individually. This does not (and cannot) support government debt and currency like a genuine sovereign state would, printing more money to pay off debt if the tax base proves insufficient. means. Eurozone member states are therefore “quasi-sovereign states” because they effectively use “foreign currency.”
The current situation is not sustainable in the long term. And my research suggests only two realistic outcomes.
The first is a full fiscal and political union, with Brussels determining the levels of taxes and public spending in each member state. The second is the collapse of the eurozone. Either way, the cost to German taxpayers will be well over €1trn (£854bn).
The current slump in the German economy is partly due to a significant rise in energy costs due to Russia's invasion of Ukraine, and partly because China no longer needs German-made machine tools in its factories. could mean surrender. It responded to France's demand for fiscal and political integration.
But if it were to happen, it would be a union based on France's preferred protectionist model, with significantly more state intervention and regulation in the economy, and large state subsidies given to favored sectors and companies.
This is very different from the “ordoliberal” (or “orderly liberal”) model favored by Germany, which supports free markets but seeks to prevent powerful private interests from undermining competition.
But never in history has a nation, let alone a continent, regulated the path to economic success. For now, T2 is a silent rescue system that people rarely talk about, but on which the very survival of the euro depends.
