ONE-HAND BATTLE. In Europe, the implementation of Euro is actually weakening most of the European economies as it limits their monetary independence and prevent them from implementing monetary policies for their own benefits.
Economists and policymakers in Euro-adopter countries are having stormy weather outside their office windows now.
Early this month the Portuguese government declared its inability to pay its debts and requested financial assistance from the European Union (EU). After the economies of Greece and Ireland collapsed last year, Portugal was the third Euro-adopter countries which failed to pay its debts and asked for bailout.
Besides, it may not be the last nation to follow the path of Greece and Ireland, and quite a few analysts claimed that debt-laden economies like Spain, Italy, France, and Belgium could be the next dominoes to fall.
The single currency policy in Euro was supposedly to be great idea at the beginning; but looking at how recent events unfolded, some optimists however started become skeptics: Is the Euro responsible for recent Europe’s mess?
The best way to understand the single currency’s predicament is to imagine a nation’s economy operates like a huge Transformers robot.
Every nation – be it Portugal, Germany, Greece, Ireland, Spain, and others– has its own robot model, with each of the robots has unique characteristics against each other. What’s similar about them is all robots are armed with two guns both on their right and left hands (as seen on the movie), so they can protect themselves from their enemies and their overall stability can be assured.
Suddenly, robots from European countries come up with a seemingly great idea that they, apparently, could become stronger if they just unite and combine their small guns into one gigantic weapon. This could be done only if each robot is willing to sacrifice the gun on their left-hand, so it can merge with other robots’ guns to be transformed into one gigantic and powerful weapon.
Several robots from Croatia and England refuse the offer, but almost all European-built robots agree with this proposal. In the end, those robots boast a one-for-all gigantic and massive weapon as the reward of their unification, with the expense of having only one gun in their right hand as they continue their survival.
Today, the importance of those missing hands starts to be felt; but unfortunately now is simply the point of no return for those European nations.
Basically, to fix problems and avoid crises in the economy, a policymaker is equipped with two powerful “weapons”: A monetary policy which is related with interest rates and currency, and a fiscal policy which is related with tax and government spending. For example, United States implemented both fiscal and monetary policies in the form of a 1 trillion dollar tax cut (fiscal) and slashing interest rate to the level of 0.25 percent (monetary) to resuscitate its economy during the last financial crisis.
But when Euro-adopter country like Spain suffer from high unemployment rate like today, Spanish policymaker could not simply adjust the interest rate (monetary) to shoot down the problem. Because they decide to use Euro as a single currency, all policies that related to currency –which are monetary policies– have to be thoroughly discussed and carefully implemented for the sake of the EU members as a whole, not a single country like Spain alone.
During this situation, other European countries like Germany or France may have different economic interests than Spain’s, and slashing interest rate –a policy which would devalue the Euro– perhaps would make those countries worse-off.
In other words: It’s true that those robots sacrifice one of their hands and hold share in the massive weapon, but one simply could not use the weapon as he pleases –because other robots, presumably, may have different type of enemies to shoot.
What exacerbates the problem is not all European robots are armed with right-hand weapon that is powerful enough to cover their left-hand weapon’s loss. Some countries like Germany and Finland have strong fiscal position, while the balance book of countries like Greece and Ireland are full of debts and could not really afford to spend much money for fiscal policies.
The consequences are predictable: The economies of Greece and Ireland defaulted, and EU member countries with strong fiscal position suffered enormous economic losses as they had to provide the multi-billion bailouts to help those ill-fated economies.
Some ASEAN representatives and economic ministers believed that the implementation of single currency in ASEAN could bring economic community in the region to the next level, as it would enhance economic development in the area and forge stronger ties among ASEAN countries.
But current Europe’s crisis is a lesson to learn for Indonesia and ASEAN as the risk and the potential economic losses if the single currency policy fails is indeed massive.
Yes it is true that the single currency has boosted trade numbers in EU by as little as 10 percent since it was first implemented. But as recent events show, Europe’s single currency in Euro turns out to be a monetary trap and makes some economic problems more complex than they actually are.
If Euro fails in those Europe’s developed and high-welfare economies, adopting single currency in ASEAN –a region where developing and developed economies are living side-by-side and economic gaps among them are obvious– is definitely not a wise idea. At least not for now.
Indeed, after a decade full of applauds for Europe and its success story of single currency implementation, today is the day when the credibility of single currency policy is being put on its highest test.
This article was published in The Jakarta Post on Wednesday, April 20 2011