Putera Satria Sambijantoro, Jakarta | Wed, 04/20/2011 8:00 AM | Opinion
Economists and policymakers in euro-adopter countries are experiencing stormy weather outside their office windows.
Early this month the Portuguese government declared its inability to pay its debts and requested financial assistance from the EU. After the economies of Greece and Ireland collapsed last year, Portugal is the third euro-adopter country that has failed to pay its debts and ask for a bailout.
Besides, it may not be the last nation to follow the path of Greece and Ireland, and quite a few analysts claimed that debt-laden economies, such as Spain, Italy, France and Belgium, could be the next dominoes to fall.
The single currency policy in euro was said to be a great idea at the beginning; but looking at how recent events have unfolded, some optimists have become skeptics: Is the euro responsible for recent Europe’s mess?
The best way to understand the single currency’s predicament is to imagine that a nation’s economy operates like a huge Transformer robot.
Every nation — be it Portugal, Germany, Greece, Ireland, Spain and others — has its own robot model, where each robot has unique characteristics that work against each other.
What is similar about them is all the robots are armed with two guns both in their right and left hands (as seen in the movie), so they can protect themselves from their enemies and their overall stability can be
assured.
Suddenly, robots from European countries develop a seemingly great idea that they, apparently, can become stronger if they just unite and combine their small guns into one gigantic weapon. This can be done only if each robot is willing to sacrifice the gun in their left hand, so it can merge with other robots’ guns to transform into one gigantic, powerful weapon.
Several robots, such as from Croatia and England, refused the offer, but almost all European-built robots agree to this proposal. In the end, those robots boast a one-for-all gigantic and massive weapon as the reward for their unification, with the expense of having only one gun in their right hand as they continue their survival.
Today, the importance of those missing hands begin to be felt; but, unfortunately, now is simply the point of no return for those European nations.
Basically, to fix problems and avoid crises in the economy, a policymaker is equipped with two powerful “weapons”: A monetary policy related to interest rates and currency, and a fiscal policy related to tax and government spending. For example, the US implemented both fiscal and monetary policies in the form of a US$1 trillion tax cut (fiscal) and slashing the interest rate to the level of 0.25 percent (monetary) to resuscitate its economy during the last financial crisis.
But when euro-adopter countries such as Spain suffer from high unemployment rate like today, the Spanish policymaker could not simply adjust the interest rate (monetary) to shoot the problem. Because it uses the euro as a single currency, all policies relating to currency, which are monetary policies, have to be thoroughly discussed and carefully implemented for the sake of EU members as a whole, not a single country like Spain alone.
During this situation, other European countries such as Germany or France may have different economic interests to Spain’s, and slashing interest rates — a policy which would devalue the euro — perhaps would render those countries worse off.
In other words, it is true that those robots sacrifice one of their hands and hold a share in the massive weapon, but one simply cannot use the weapon as he pleases — because other robots, presumably,
may have different type of enemies to shoot.
What exacerbates the problem is not all European robots are armed with the right-hand weapon that is powerful enough to cover their left-hand weapon’s loss.
Countries such as Germany and Finland have a strong fiscal position, while the balance book of countries such as Greece and Ireland are full of debts and cannot really afford to spend much money on fiscal policies.
The consequences are predictable: The economies of Greece and Ireland defaulted, and EU member countries with strong fiscal positions suffered enormous economic losses as they had to provide multi-billion bailouts to help those ill-fated economies.
Meanwhile, Indonesia and its neighbors in the ASEAN region have been weighing the possibility of having a single currency such as the euro for years.
Some ASEAN representatives and economic ministers believed that the implementation of a single currency in ASEAN could take the economic community in the region to the next level, as it would enhance economic development in the area and forge stronger ties among ASEAN countries.
But currently, Europe’s crisis is a lesson to learn for Indonesia and ASEAN on the risks and to realize that the potential economic losses if the single currency policy fails is indeed massive.
Yes, it is true that the single currency has boosted trade numbers in the EU by as little as 10 percent since it was first implemented. But as recent events show, Europe’s single currency turns out to be a monetary trap and makes some economic problems more complex than they actually are.
If the euro fails in Europe’s developed and high-welfare economies, adopting a single currency in ASEAN — a region where developing and developed economies are living side-by-side and economic gaps among them are obvious — is definitely not a wise idea, at least not for now.
Indeed, after a decade full of applaud for Europe and its success story of single currency implementation, today is the day when the credibility of single currency policy is being put to its highest test.
The writer is a student at the University of Indonesia’s School of Economics.
