Federalism key to saving Europe - by Patrick Artus

The crisis in the euro zone has taught us a lot about the functioning of currency areas, which is markedly different to that which is most often expected. First of all, monetary unification creates increasing heterogeneity in the countries and regions that form the currency area, because it enables production specialization; the heterogeneity is not caused solely by bad economic policies implemented in some countries.

The euro will therefore only be sustainable, beyond the short-term bailout plans, if the euro zone’s institutions enable this heterogeneity to be countered, if federalism makes it possible for the regional adjustments in wages to be bearable and if the financing of euro-zone countries is ensured in ways that discourage speculation, which is still far from being the case.

First, it is impossible to imagine the survival of the euro zone if there is, on the one hand, increasing heterogeneity of income levels throughout the regions, due to the diversity of productive specialisations, and, on the other hand, the need to carry out significant downward adjustments in wages in certain countries, in order to achieve the necessary real depreciation of the exchange rate, in addition to the resulting risks of a depressive spiral and divergence between countries.

To make these changes bearable, the only solution is federalism, i.e. income transfers from high-income countries to low-income countries. Unfortunately, we know this is being increasingly rejected by the euro zone’s Northern countries.

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