Europe doesn’t need another currency crisis

After eight difficult years doing whatever it took to support Europe’s economies, Mario Draghi is about to step down as the president of the European Central Bank (ECB). In taking up this challenge, his successor, Christine Lagarde, faces the same underlying problem:
The currency union at the center of the European project is unfinished work.
From the beginning, the euro has been incomplete by design. Its creators knew that to share a currency, countries must also share risks — as, for example, states in the US do through federal institutions such as a common budget, social safety net and financial backstops. Otherwise, the centrifugal forces of divergent economies would threaten to tear the union apart. These essential mechanisms were left out, because member nations weren’t ready for the loss of sovereignty they would entail.
Visionaries such as Jean Monnet and Tommaso Padoa-Schioppa thought that the resulting crises would push Europe in the right political direction. To some extent, this has happened. The sovereign-debt debacle that began earlier this decade — and that brought Greece to the brink of abandoning the common currency — compelled Europe’s leaders to take steps toward deeper integration. They established elements of a banking union, for example, including centralized entities with the power to supervise, take over and shore up the region’s financial institutions.
What remains to be done, though, dwarfs the progress that’s been made so far. Efforts to create a euro-area budget to mitigate recessions — as federal transfers do for states in the US — have gone nowhere. And the banking union has stopped short of real risk-sharing: It won’t spend joint public funds on recapitalisations, and its “third pillar” — a mutual deposit-insurance system — is still only a proposal. As a result, measured by cross-border lending, financial integration in Europe has stalled.
The flaws in the euro’s structure have taken a heavy human, economic and political toll. Greece endured a depression and untold suffering that, in a proper risk-sharing union, would have been largely unnecessary. Draghi’s extraordinary efforts to hold the currency together — necessary as they were — depleted the ECB’s resources, leaving it ill-prepared to fight the next recession. Europe’s dysfunction shattered faith in the political establishment, contributing to the populist and right-wing resurgence that has swept across the Western world.
The UK’s bid to exit the EU should be seen as a warning: If the next country to leave is a member of the euro area, the whole enterprise — aimed at binding Europe together so that the horrors of two world wars would never happen again — could fall apart. The strategy of forging closer union through successive crises has reached its limits, achieving too little at far too great a cost, and undermining rather than building support.
This leaves Europe’s leaders with just one safe course: Find the will to act in relatively benign times, so that the next crisis won’t happen in the first place, or won’t be quite so painful if it does. Naturally, obstacles abound — particularly in Germany, where politicians see any moves towards greater risk-sharing as anathema. That said, the incoming president of the European Commission, long-serving German cabinet member Ursula von der Leyen, is better placed than her predecessors to navigate her country’s politics.

—Bloomberg