Democracy or Euro: Who Will Surrender?

• DOI: http://doi.org/10.1002/jcaf.22077
• Published date: 01 September 2015
• Date: 01 September 2015

29

© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22077

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Democracy or Euro: Who Will

Surrender?

Alberto Lanzavecchia and Eugenio Pavarani

“If there was ever

a bad idea, EMU

is it.”

—Dornbusch,

1996

EUROZONE IS A

POLITICAL PROJECT,

NOT AN ECONOMIC

ONE

More than 170

publications written

during the period

1989–2002 by emi-

nent U.S. academic

economists addressed

a simple question:

“Is the Economic

and Monetary Union

(EMU) a good or a

bad thing?” Based on

an optimum currency

area approach, their

common conclusions

were startling: Poten-

tial EMU Member

States were farther away from

a well‐functioning monetary

union because of the lack of a

pan‐European fiscal redistribu-

tion mechanism, a lower labor

mobility in Europe, and a higher

frequency of regional asymmet-

ric shocks in Europe than in the

United States (Jonung & Drea,

2009, pp. 33–34).

With the introduction of

the euro, the most effective and

the promptest

instrument for the

adjustment of the

external imbalances—

the exchange rate

fluctuation—ceased

to function. Alter-

native mechanisms

would have then

adjusted imbal-

ances, driving

weaker countries to

achieve competitiv-

ity through “internal

devaluation,” that is,

by shrinking wages

in order to make

the local production

cheaper. Any differ-

ential in competitiv-

ity would then have

been transferred from

the exchange rate

market to the labor

market: Depreciate

either the currency or

the labor.

According to

economists, given the modest

flexibility of the labor market

and the weak labor mobility

within Europe, such a result

could have been obtained only

as a consequence of recessions,

This article offers insights into the eurozone, one

of the most challenging experiments toward mar-

ket and political integration through a single mon-

etary unit—namely, the euro. However, whereas

markets might be fully integrated even without a

common European currency, the euro and its func-

tional institutions are shrinking sovereignty within

member states. Today, the eurozone records the

lowest percentage of growth in the world; it is an

island of stagnation, deflation, and high unemploy-

ment rate. Six years after the beginning of the

crisis, most of the European countries have not

yet recovered the value of gross domestic product

(GDP) recorded in 2008. Dani Rodrik’s trilemma

states that democracy, national sovereignty, and

global economic integration are mutually incom-

patible. Yet the European Union is even shrinking

both democracy and national sovereignty toward a

global economic integration. Consequently, either

democracy shall raise and abort such political

project or euro will shrink democracy to village

governance level only. © 2015 Wiley Periodicals, Inc.