The Eurozone crisis: no way back

Creating a common currency area means replacing indifference by cooperation and conflict. In this sense the Eurozone crisis might not be a deadly challenge to the whole European construct, but rather become a further step towards a European society.

Georg Vobruba
15 May 2013
Demotix/Konstantinos Tsakalidis. All rights reserved.

Demotix/Konstantinos Tsakalidis. All rights reserved.


A common currency comes with undeniable benefits. It reduces transaction costs, makes bureaucracy and economic everyday life easier, it eliminates the cost of currency exchanges and the risk of changes in currency exchange rates, thus fostering transnational trade as well as investment. In addition, a common currency might be seen as a soft coercion to improve the economic productivity of a specific region or a country.

But a common currency area also has costs. These arise from the different levels of competitiveness in the regions the area integrates. The most important consequence of monetary integration is, for any country, that it has to abandon the option to devaluate its own currency.

Generally speaking, devaluation is a sort of buffer used to protect a less competitive economy against superior competitors, because devaluing a currency means that one has to pay more of this currency to buy goods priced in another currency. Thus such goods - import goods - became more expensive. And the other way around, goods from a devaluing economy - as export goods - are now cheaper, as they are paid with money from a non-devaluing (in effect revaluing) country.

Devaluation doesn’t come without a price. First, this mechanism makes competition in a devaluing country less intense, hence raising prices and lowering the quality of its supply in general. And at the end of the day, compensating a gap of international competitiveness by a devaluation causes costs for all consumers in the devaluing country. Normally, a small devaluation is likely to be accepted by the two groups of relevant actors, consumers at home and non devaluing trade partners abroad. The first experience devaluation as a more or less modest rise in prices. This inflationary effect adds to normal inflation and happens with a time lag. These two characteristics make the social consequences of devaluation mostly invisible. In other words: opposition at home against devaluation is unlikely.

The second relevant group - non devaluing trade partners, foreign export oriented firms and their employees - on the other hand, have to tolerate the disadvantages that this loss of competitiveness causes for them. If the negative effects are too strong, these actors might try to convince their respective government to respond to a devaluation abroad with a devaluation at home, in effect blowing out all effects of the initial devaluation. In this case, the danger of a "devaluation race" appears. Taking these elements into account, devaluations clearly appear far from being a patent medicine.

In a world of intense international trade, permanent devaluations make a country poorer and poorer, as it reduces the import of goods and impedes the import of capital (investments of all kinds). In order to reach its intended effects, a devaluation has to be modest, it has to be carried out by one county and tolerated by all others, and it has to be used only seldom.


At the beginning of the Euro the expectation was indeed that the common currency will force less competitive countries to improve their productivity. And for seven or eight years data on income per capita suggested a backlog boom of the less productive Euromembers.

But it remained hidden for a long time that the new affluence in the south was built on debt. Lasting and even increasing trade deficits were compensated by the import of cheap money. This import can be seen as an implicit transfer - with the illusion of getting it back. This illusion broke down in the course of the international debt crisis originating from some US banks. The trust of investors in their debtors, be they private persons or sovereign states, vanished over night. These losses of trust caused a self-fulfilling prophecy and led to the threat of bank crashes (with Lehman Brothers in New York as the most famous example). The thread of bank crashes forced states to bail banks out. In some countries it added to already high public debts, in others it led to exploding debts. This in turn caused austerity policies and led to high unemployment, hence spurring migration.

That’s were we are. The Eurozone was and is far from being an “optimal currency area”. The costs per labour/unit within the Eurozone differ widely, and so does competitiveness. And what is more, in all southern Eurocountries the costs per labour/unit increased between 2000 and 2009. This endangers international competitiveness, hence exports - as far as price competition counts. But it must be noticed that in most southern countries since 2010 labour costs per unit decrease: this has already led to an amelioration of their export/import ratios. Nevertheless, two caveats must be made: first, deficits of the balances of trade are shrinking, but this is less due to expanding exports than to decreasing imports. And second, public debts are shrinking too, but GDPs are shrinking even faster. And this so far very limited success of austerity policies comes at the costs of high unemployment and excessive youth unemployment.


At this point one can easily see that abandoning the currency exchange mechanism has a social impact. Creating a common currency area means replacing indifference by cooperation and conflict. As states became guarantors, taxpayers money and taxpayers interests became involved into the Eurocrisis. As a result, we observe a transnationalisation of distributional conflict. It does not replace the national distributional conflicts, but it adds to them. Thus, a complex conflict constellation appeared.

This complex conflict constellation is perfectly mirrored by an unclear discourse constellation. In particular, as far as opposition to the common currency is concerned, we observe surprising similarities and irritating alliances between hardly compatible political orientations. Let us take the example of an article published on openDemocracy. Ann Pettifor passionately argues in favour of a break up (or of a radical shrinking - this is not really clear) of the Eurozone. This proposal is based on illusions about a golden past, it doesn’t offer any serious diagnosis but just mentions some symptoms of the Eurocrisis, and - what’s worst - replaces an analysis of the consequences of a break up by vague promises.

The basic problem of her plea is that she ignores the risk of a chain reaction of subsequent and excessive devaluations, hence a devaluation race, causing a giant negative sum game for all participants. All in all: citing one of the world’s most successful speculators against a national currency - George Soros - to argue for a renationalization of currencies, that’s certainly something.

The people of Europe are much more cautious. There is widespread protest in the south against austerity policy, but much less against the Euro as such; and there is a lot of reluctance in the north to bail out banks and support corrupt politicians, but much more willingness for redistribution than generally assumed. Such attitudes seem to be rather rational: nobody can predict the economic and political dynamics of a break up of the Eurozone, and any kind of practical test would happen in the case of an emergency. This is the reason why there is no going back. In Greece, the only party clearly in favour of leaving the Euro is the neo-fascist Golden Dawn. Left wing Syriza advocates better conditions for Greece, but by no means an exit from the Euro. In Germany, it is almost exclusively embodied by a handful of conservative-liberal economists who recently founded a new party named “Alternative für Deutschland”, plus some people like the controversial former German "Centralbanker" Thilo Sarrazin, who advocated a partial or a total renationalization of the currency system in Europe.

One can easily see that in the case of the Eurocrisis the distinction between right and left hardly provides any useful orientation. Indeed, it is a big problem that there is currently no critical theory of European integration in sight: a genuine intellectual perspective to criticise European integration and the Eurozone is still missing. In the meantime, “Grexit” as a patent remedy is all but convincing. Pettifor reports that in an Open letter to the People of Greece she proposed “that Greece should exit the Eurozone”. But “the advice was not taken”. Surprise.


The meagreness of the arguments of radical Eurosceptics as well as the ambivalent attitudes of the majority of the people in Europe towards European integration and the Euro are strong signs that the common currency is more or less irreversible. There is no doubt that the common currency in its present represents a textbook example of incomplete institutionalization (article in German), causing severe social problems and putting European integration as a whole under stress. But much more likely than its winding up are processes of supplementary institutionalization, contributing to “the social construction of the European society”.

Mundell's theory of optimal currency areas might be used in order to predict some likely outcomes of the crisis.

1) The economies of the southern Euro countries will improve, simply because they have no other choice. Basically, a transformation is required similar to the one which eastern EU members have undergone after 1989. This analogy reveals that this will take time and needs external financial support.

2) Migration will intensify. This is already taking place: the Goethe-Institut reports a growing interest in their German language classes. Governments in Germany and Austria explicitly recommend people to apply for jobs. At present the German Academic Exchange Service (DAAD) starts a program aiming at the improvement of international employability of young academics from southern Europe. Of course these are drops in the bucket, but the initiatives point towards transnational cooperation and institutionalization.

3) As austerity turns out to be inadequate, different forms of transnational transfers within the Eurozone will develop. Eurobonds will be back on the agenda. Credits will be prolonged and a part of them will finally be written down.


Is the common currency a step towards a genuine European society? This actually depends on what we understand as the term “society”. By asking this question we immediately approach a very demanding sociological problem. In the course of its first 100 years Sociology has offered many definitions of “society”. But I do not think that it makes that much sense to build a definition first and then use it as a check-list in order to find out whether something is a society or not. We should rather observe what people are doing and thinking. In other words: Sociologists are obliged to restrict themselves to second order observation. We observe observations. And if we do this we at least are able to see strong signs for a European society in the making. At present we see power differentials, a lot of social tensions and complex conflicts. But for the ongoing social construction of a European society it is not important whether there is conflict or harmony. The crucial point is that these new conflicts refer to a transnational, European frame.

Georg Simmel in the famous chapter “Der Streit” (the quarrel) of his 1908 Soziologie monography analyzed several effects of social conflict for social integration. Simmel sees indifference as the opposite of both conflict and cooperation, and he states that quarrel is an important step from mutual ignorance to social entanglement. This is exactly what happened by introducing the common currency: abandoning the currency exchange mechanism replaces indifference by conflict and cooperation. But Simmel also emphasises that the integrative impact of quarrel can only happen within a commonly shared and consented frame. It is not totally clear whether in the case of the Eurozone and the EU in general such a common frame exists. Simmel primarily referred to a consent of values and beliefs, rather than institutions.

History, however, has shown that institutions are at least partially able to replace consent. The Euro is already a consolidated set of institutions, and it is about to be supplemented by additional institution building. In this sense one might state that far from disrupting the European project the common currency is a further step towards a European society. 

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