The future of the euro is not a technical matter. Of course, the quality of a currency should be evaluated by its capacity to preserve its purchasing power and to ensure that companies and individuals do not get distorted signals (for example, by artificially low interest rates). There is no doubt that from this viewpoint, the euro’s record is rather disappointing. Yet that record has not provoked any major outcry. The media have consistently ignored that the euro has lost about 20 percent of its purchasing power since its inception in January 2002. The public hardly complained when the European Central Bank cut interest rates to help troubled banks and heavily indebted governments.
The line between skepticism of the euro and skepticism of the European Union has become fainter and fainter. The most vociferous opponents of the EU architecture identify the euro as the root of most evils. Rather than taking aim at the European Commission’s policymaking, however, they pretend that by leaving the euro, the set of regulations and directives issued by Brussels would disappear as if by magic. One has the impression that the main euroskeptic parties have neglected to develop the serious technical plans that would be needed to move their countries away from the euro and toward a new national currency; nor do such parties put much effort into explaining what they intend to do with the new monetary units.
The very essence of euroskepticism is becoming muddled. For example, the Dutch euroskeptic leader Geert Wilders does not hide that his party intends to have the Netherlands leave the EU in order to stop immigration; Marine Le Pen claims that a French exit (from NATO as well) is the only way of escaping the evils of globalization; while Italy’s Five Star Movement, headed by former comedian Beppe Grillo, has recently backtracked on its earlier positions, and now argues that it only wants a public debate on the euro followed by a referendum on whether to keep the currency.
No real threat
Euroskepticism will likely not represent a real threat to the euro as long as it relies on nationalistic visions. Leaders such as Mr. Wilders, Ms. Le Pen and Mr. Grillo have failed to present consistent and convincing arguments against the single currency. Perhaps their teams of experts are unable to articulate a line of reasoning accessible to a reasonably well-informed public, or perhaps the political bigwigs find it difficult to convey the right message.
It is undeniable that the public at large is dissatisfied with the incumbent political elites. Nonetheless, populism and disgruntlement should not be confused with the willingness to take a leap in the dark, especially when the leap implies following leaders who are less than credible. There is no doubt that euroskeptic parties gain some electoral success by exploiting people’s discontent and by resorting to topics that have little to do with the EU. However, these parties run up against their limits when they propose significant institutional disruptions.
For example, immigration is certainly a major problem in several European countries, and raises important questions regarding the welfare-state systems, the labor markets, law and order. Surely, it is easier to advocate quitting the Schengen area and building walls, rather than reforming social security, cutting taxation and improving the effectiveness of the judicial system. These questions have little to do with the monetary unit one uses, and mixing these topics with the euro has not turned out to be the winning argument.
This seems confirmed by the Netherlands’ recent elections, which Mr. Wilders’ Party for Freedom was unable to win after leading the field for many months. Ms. Le Pen could be facing the same fate. Although she has topped the polls since last year, the most recent surveys predict that in the second round either the leftist candidate Emmanuel Macron or the center-right candidate Francois Fillon – both strong supporters of the EU and the common currency – could easily rally the majority of the French electorate against her and win the presidency.
Accordingly, two separate scenarios are likely to occur relatively soon. One regards the euro and the other immigration. These two topics have nothing in common, but they could be exploited to reach out to different sections of the electorate and inject new life into populism. If this happens, the collateral damage could be substantial, but not dramatic.
As mentioned earlier, the euro is under attack for reasons that have little to do with the European common currency. A large portion of the European electorate is unhappy about their employment prospects, a welfare state that fails to live up to its promises and the weakness of recovery after years of stagnation. The solution is decentralization, deregulation, a reduction of bureaucracy and drastic cuts in government intervention in the economy.
However, these are not the economic policies of most euroskeptic parties, which in fact advocate centralized policymaking at a national level, more redistribution and generous social security systems. The emphasis on these themes probably makes sense if a political leader is looking for extra votes: according to a Eurobarometer survey, at the end of 2016, 82 percent of EU citizens wanted a high level of social protection. To pretend that a highly regulated economy does not necessarily lead to poor performance and unemployment, one needs a scapegoat that is both strongly symbolic and whose workings are difficult to understand. The euro meets these requirements.
A few conclusions follow. First, the populist vein of euroskepticism needs the euro to stay alive, and needs incumbent policymakers to keep praising the single currency while doing nothing to fix their countries’ structural problems. Second, euroskeptic movements should be happy to remain powerful opposition parties, calling for wall building and decrying international trade. If they ever obtained the power to rule, they would be supported by a mix of left-wing and right-wing statist coalition partners who would pave the way for some kind of collectivization. This would not be the road to fast growth and full employment. Putting up walls and implementing autarkic policies would just make the economic situation worse.
Over the next few years, the only real challenge to the euro will probably come from Germany, the one country where euroskepticism could have dramatic consequences if it becomes the prevailing attitude. According to the polls, Germany’s two major parties would command a solid majority in parliament, and they are both squarely in the pro-euro camp. Only 10 percent of the electorate would support the euroskeptic party (Alternative for Germany). Ironically, the worst scenario for the non-German euroskeptic parties would therefore be for Berlin to change tack and force some countries out of the euro, which would make euroskepticism irrelevant. Fortunately for the euroskeptics, this is unlikely to happen.
Immigration will therefore remain the only real arrow in the euroskeptics’ quiver. Yet, as the Dutch example has recently shown, urging anti-immigration laws is not enough to become prime minister, especially when the incumbent reacts. Prime Minister Mark Rutte reacted to Mr. Wilders’ populism by requiring immigrants to integrate. It would be easy for EU authorities to defuse euroskepticism by recognizing their failure to deal with immigration and by allowing each country to have second thoughts on Schengen. Yet this would require an act of modesty that the European Commission does not seem willing to perform.
Schengen has created challenges that the EU has not been able to meet. By refusing to admit defeat, Brussels has ended up strengthening populist anti-EU movements that today threaten to destroy the bloc’s desirable features, such as free trade and, with reservations, the euro. Brussels has decided to run the risk and live with euroskepticism for fear of tarnishing its image. So far, the gamble has paid off – and it probably will in the future. However, it is hard to predict what happens once you start a race between arrogant bureaucrats and those who dabble in populism.
Enrico Colombatto is Professor of Economics at the University of Turin and Director of Research, Institut de Recherches Economiques et Fiscales (IREF) in Paris. This report was published by Geopolitical Information Services (GIS).