Two Speed Europe – Possible Outcomes and Implications
The French President, Nicolas Sarkozy, caused quite a stir on 8th November, after he called for a two-speed Europe. This would consist of a ‘federal’ core of the 17 countries using the Euro as their currency with the 10 other members of the European Union, which do not use it, forming a loose ‘confederal’ outer band.
The 10 EU countries that have not adopted the Euro are Denmark, United Kingdom, Sweden, Lithuania, Latvia, Poland, Czech Republic, Hungary, Bulgaria and Romania.
The idea of a two-speed or even multi-speed Europe is of course nothing new; in a continent with so many different languages and cultures there is no obvious reason why they should all move towards integration at the same pace.
There is huge pressure on the 10 European Union member states that have not yet accepted the Euro as their official currency to do so. They have even been required to commit themselves to the single currency sooner rather than later.
In the light of the European debt crisis and taking into account what happened in countries such as Ireland and Greece, the non-Euro EU members are, however, even less likely to commit themselves to accepting the Euro in the near or even medium term. Poland, for example, has been stalling on entry before the debt crisis and the current situation will only exacerbate the situation.
What is emerging is a two-block Europe, with countries that are using the Euro moving even closer together. Some form of central fiscal control over individual government spending will most likely also be agreed upon in the near future.
The current European debt crisis has, however, opened up deep rifts between the positions of countries such as Germany and France in this regard. The German position is that there should be more integration and control over the budgets of individual countries before the European Central Bank can be expected to provide assistance to them if they get into trouble. France, on the other hand, wants the ECB to intervene and take collective control over European debt to prevent the Euro-zone from disintegrating.
The 10 EU members outside the Euro-zone will continue developing in a much more autonomous manner. Since there will be no central control over their government spending and borrowing, it is likely that we will see a recurrence of the Irish or Greek situation in one or more of these countries. Whether the ECB would be prepared to bail them out, given their non-membership of the Euro-zone, remains an open question. This could see these currencies weaken considerably against the Euro in the long run.
In Fig. 12.09(a) we see that, despite recent weaknesses, the Euro has increased in value by over 40% against the British Pound in the last 11 years. If, and only if, the Euro-zone governments can resolve the current debt crisis, we could well see a resumption of the long-term bull run of the Euro against independent UE currencies, such as the GBP, providing a great investment opportunity to long-term traders.
In light of the above, it is highly unlikely that countries such as Greece would decide to leave the Euro-zone and abandon the Euro. Their debts would still be denominated in Euros and reverting to their former currencies could well see them plummet overnight, thereby dramatically increasing these debts.