By Marcus Walker
BERLIN -- The euro survived the financial crisis and a lost
decade for the European economy. Now its test is political, and it
is likely to survive it -- battered as ever and still getting the
blame for Europe's problems.
In Europe's year of election contests between the political
establishment and its enemies, the euro is a target for populist
insurgents and some mainstream figures. The common currency is
variously getting blamed for unemployment, industrial decline, loss
of national identity and German hegemony.
France's far-right leader Marine Le Pen, who faces centrist
candidate Emmanuel Macron in the final round of the presidential
election on May 7, wants a referendum on leaving the euro. So does
Italy's antiestablishment 5 Star Movement, which could win power in
elections due by mid-2018.
Mr. Macron, whom opinion polls favor to win next Sunday,
supports the euro but says it needs a major overhaul. He argues the
currency union is skewed toward German interests -- a common view
outside Germany -- and says the euro's 19 countries need a common
budget to finance growth-friendly investments and recovery in
struggling members. That's anathema to Berlin.
The euro was meant to bind European countries together,
economically and politically, while boosting investment,
productivity and growth. Instead, it has coincided with crises and
exposed underlying weaknesses in many countries.
However, today's political attacks on the euro are unlikely
break it up. Although Europeans love to criticize the euro, they
mostly don't want to leave it. Opinion polls have consistently
shown low support for returning to the franc, the peseta or the
drachma. Only in Italy is support for the euro more tepid, although
it's still more popular than exit.
In Southern Europe, the former national currencies are still
associated with the bad old days of inflation and repeated
devaluations. In Northern Europe, economies haven't performed all
that badly under the euro. Across the continent, the crisis years
taught most voters and politicians that breaking up the euro would
bring massive financial turmoil. The middle class isn't willing to
risk savings held in euro-denominated assets. Even many people who
think joining the euro was a mistake say the costs of leaving it
are too high.
With Europe's economic recovery now finally improving after
years of sluggish growth, the argument that countries can't grow
under the euro is weakening. Many economists believe the eurozone's
growth could be close to 2% this year, a fast pace by recent
standards.
The euro remains far what from what economists call an optimum
currency area. Ideally, a currency should cover an economic zone
where labor and capital move fluidly, where common taxes and public
spending help weaker regions to keep up, and where the financial
system has common supervision and a backstop in times of
crisis.
The eurozone still lacks many of these features, even though it
has strengthened its crisis-fighting tools. "The eurozone remains
incomplete, and there will come a day when it faces a crisis to
which the only answer is fiscal union," says Nicolas Veron, a
French economist and fellow at the Peterson Institute for
International Economics in Washington.
Being far from optimal meant that the eurozone took longer than
other major economies to recover from the financial crisis. For
instance, because some countries couldn't adjust through
independent currency devaluation, labor costs adjusted through
painful wage deflation instead. But recovery is now under way in
most of the bloc.
Greece is one exception. Its economy remains stuck in
depression. A bigger question mark is Italy, the eurozone's
third-biggest economy. Stubborn economic stagnation has undermined
public support for established parties and drawn voters toward
populists who question the euro.
But the contrast between Italy's failure to grow and Spain's
accelerating recovery strongly suggests the fault lies at the
national level, not with the common currency. Spain's economy grew
by over 3% last year, whereas Italy grew less than 1%.
Even members of the 5 Star Movement say leaving the euro
wouldn't solve Italy's deep structural problems. The party is
internally divided over its own proposal for a referendum. Italy's
core growth problem -- stagnant, even declining, productivity --
has been evident since the mid-1990s, before the euro's
creation.
There's little evidence that the euro is to blame for France's
economic problems, says Daniel Gros, director of the Center for
European Policy Studies, a Brussels think tank. The country didn't
develop major imbalances, and its exchange rate under the euro was
never obviously too high, he says. Many economists say France's
growth could improve, given political stability, some reforms and
better confidence.
Ms. Le Pen's main objection to the euro is about national
sovereignty. But there are three hurdles to her ability to pull
France out. She would need a major upset to win the presidency. It
would be an equally big surprise if her National Front won control
of parliament in June elections, giving her legislative support for
a referendum. And nearly three-quarters of French voters oppose
leaving the euro, according to surveys.
"The cost of breaking up the euro is so high that this probably
won't be the consequence of the challenge from populism," says
Christian Odendahl, chief economist at the Centre for European
Reform, a London-based think tank. "Rather, the issue is resistance
to the broader European project. If populists win power on the
basis of anti-euro rhetoric, countries' willingness to work
together in Europe will be constrained."
(END) Dow Jones Newswires
April 30, 2017 09:14 ET (13:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.