Euro Money as Euro Language

This is the first of a series of reflections on the social meaning of the Euro.

Investigations of the social character of money often feature an analogy to language. Like words, money forms intelligible signs. Money, like language, is a critical medium of social exchange. Money, like language, is constitutive of identity: the particular kind of money we use, in part, makes us who we are. And money, like language, is both stable and unstable over space and time.

The architects of the European Monetary System (EMS) anticipated that the Euro would serve as an institution around which a European consciousness could be built. The Euro (at least in its material forms) functions like the EU flag or the EU passport to construct a new identity that plays on commonplace nationalist expectations. That is, when we see flags or passports or money, we have been acculturated to expect national sponsorship. The European Union thus displaces the traditional state in presenting itself through these institutions; if not precisely declaring itself to be a state, the European Union is, at a minimum, asserting that it is like a state for various intents and purposes.

But notice the peculiarly assertive case of the Euro. The EU flag often flies alongside the traditional flags of the EU Member States. The EU passport is formally issued by the respective member states: while it prominently features “European Union” on its harmonized cover, it also bears the name of the relevant member state. The EU passport in fact overstates the EU nature of the document. A passport begs the admission of a members state’s nationals into another state’s territory; it is only secondarily evidence of nationality (and in the case of EU passports, evidence of the bearer’s status as an EU citizen). Through flags and passports, the EU and the relevant EU member state co-occupy a space in the EU citizen’s imagination that had been occupied by the state alone.

The Lost Continent by Gavin Hewitt

The challenge with European democracy is its constantly shifting notions of demos - who are the people who should exercise political determination. The current Euro crisis - and the ensuing imposition of austerity policies on Greece and Ireland, Spain and Italy - demonstrate a democratic irony. As Gavin Hewitt points out, there is nothing democratic about the adoption of austerity; austerity is not a lifestyle choice struggling countries freely assume. The Euro crisis precipitated changes of government (left to right and right to left) in the affected Member States and fierce popular backlash. Yet Angela Merkel, the physician prescribing austerity to faltering countries, responds to democratic signals given by her German electorate (who balk on bailing out their neighbors). Hewitt constructs a story where the democracy of Germany is pitted against the democracy of Southern and Peripheral Europe. 

The Lost Continent focuses on national stories - and national leaders - and so at times has the feel of a tell-all. Silvio Berlusconi, to no-one’s surprise, comes off the worst. His cynical disregard for anyone’s interest saves his own marks, a new low in post-War Italian politics. Imagine how Angela Merkel felt upon receiving his ‘political’ advice to take on a lover. And even more respectable characters, such as Sarkozy, engage in behind-the-back smirkiness with regard to Merkel. But much of the focus falls on Merkel herself; we’re never quite sure whether she is (as she claims) acting just like a Swabian housewife, guided by common-sense and prudence, or whether she is the instrument of peculiar German obsessions outside her control.

And so The Lost Continent is to a great extent a German story of Europe (the UK barely figures). Germany is able to impose austerity on its EU partners because it is German resources that largely fund the rescue. Germany’s economic primacy permits it an outsized influence in contemporary European affairs - Hewitt and various of his informants note that Germany may be more powerful than ever. Germany has benefited from this new Europe; its products are consumed throughout. Its economic success permitted the reunification of Germany, an enormous political and social success (ironically, Merkel developed her political skills in the East).

Abandoning the Euro, Saving the Euro

The Euro crisis tests more than the viability of the current currency arrangements. The sovereign debt crisis affecting Greece and Ireland, Italy and Spain is also testing the limits of wider European democracy. The status quo will likely be abandoned. The open question is whether the Euro crisis will lead to deeper integration among the EU Member States (as an artifact of a Euro rescue) -- or whether a collapse of the Euro will signal a retreat from the past achievements of the European project.

The European Union began as a common market for goods and services. A common European currency space is a more recent development -- the Euro serves as the currency of most (but not all) EU Member States. Adoption of the Euro has reduced trading costs, and has led to more transparent prices.

The Euro crisis is first and foremost a sovereign debt crisis, initially affecting a handful of EU Member States running unsustainable deficits. The sovereign debt crisis is itself an artifact of the establishment of the Euro -- neither Greece nor Spain would have been able to borrow as much in their former currencies (or on such favorable terms) as they were able to using the Euro. Prior to the Euro crisis, the financial markets valued Euro-denominated Member State obligations similarly. As the crisis developed, lenders became far more discriminating, demanding much higher Euro interest rates from weaker Member States (such as Greece and Spain) than from others.

Euro Collapse or European Banking Union

The implementation of the Basel III banking reforms in Europe has spanned two financial crises. And the European legislation is haunted by two specters: a possible collapse of the Euro; and -- in the alternative -- a blind leap into a European banking union.

The first crisis of course was the 2007 global financial meltdown that led to significant bank failures and costly bank bailouts. The Basel III reforms were designed to prevent a re-occurrence of this kind of banking crisis through various new mandates and disciplines. The Basel III response was negotiated within the Group of 20, where Europe had a substantial presence and an important influence. Based on the past record of enthusiastic adoption of Basel norms by Europe, one might have expected the passage of Europe's CRD IV legislative package to be largely a technical exercise. It has not proven to be one.

This is due in part to the timing. The complex European legislative process -- extending well over a year -- coincided with the outbreak of the second severe crisis, one more specifically centered on Europe. This second -- and ongoing -- crisis is the sovereign debt crisis (or the Euro crisis). Initially involving Greece, the sovereign debt crisis has spread to Italy and Spain, sharply raising borrowing costs of these seriously indebted countries and miring their respective populations into social misery.

Bank Capital Reform in the Shadow of the Euro Crisis

European banking reform continues to develop alongside of - and perhaps in spite of - the ongoing Euro crisis. A significant EU reform package - involving a new directive (Capital Requirements Directive IV, or CRD IV) and a new regulation (Capital Requirements Regulation, or CRR) - is making its way through the EU legislative institutions. These reforms are driven in large part by Europe's undertakings within the global Basel system: Europe has committed to implement much of the most recent Basel package of reforms (known as Basel III) by January 2013.

One of the chief requirements of the Basel III reforms is to increase both the quantity and quality of the 'regulatory capital' banks must hold. This capital is intended to operate as a financial shock absorber in the event of large losses - assuring a bank's continued solvency and sparing shareholders (and - in a worse case - taxpayers) pain. Basel III is a system of minimum standards - countries are expected to comply with Basel III's requirements but are free to impose higher standards. And several countries (Switzerland, for example) have determined to require their banks to maintain even more regulatory capital than what Basel III demands.

The combination of common minimum standards and regulatory flexibility is familiar to the EU Member States: it is a feature of most EU-level regulation, known as "harmonization". But in its most recent drafts of CRD IV and CRR, the EU proposals called for "maximum harmonization," a design where the Basel III minimum standards serve to fix mandatory standards for the implementing EU Member States. Basel III requires that national regulators impose a minimum capital requirement for so-called Tier 1 capital ratio of 6 percent. By its terms, the Basel III framework permits countries to impose higher Tier 1 capital ratio requirements. But to permit each EU Member State to impose its own Tier 1 capital ratio requirement (so long as it exceeds the Basel III minimum) would introduce competitive and operational stresses within the somewhat unified European banking market. These concerns in turn have motivated EU officials to prefer "maximum harmonization" whereby all EU Member States would enact identical Tier 1 capital ratio obligations.