The euro crisis – A standardisation perspective

The euro is the result of a standardisation process. Analysis of the euro crisis from the vantage point of standardisation theory tell us that a common currency requires the creation of a unified state. If we cannot accept that idea, we need to go back to national currencies. There is no middle ground.

Standardisation research usually involves technical standards and sometimes standards for services, processes or management systems as well. But the euro, too, can be regarded as a standard while the road toward its introduction may be seen as a standardisation process, defined as the activity of establishing, with regard to actual or potential problems, provisions for common and repeated use, aimed at the achievement of the optimum degree of order in a given context (ISO-IEC, 2004). Simons and De Vries (2002, Section 1.5) defined criteria for good standards. The euro fails to meet two of these criteria: stakeholder support and alignment with related standards. This paper first explains why the euro does not meet these criteria and then analyses the consequences. The conclusion and discussion section includes recommendations for solving the euro crisis.

The euro assessed against criteria for a good standard

First of all, a good standard must have sufficient support from the stakeholders. However, the introduction of the euro was primarily a matter decided by the financial-economic and political elites (Böll, 2012), without too much involvement by the most important interested parties, namely citizens and the private sector. When matters first appeared to go well, support for the euro increased, but is now weakening and meanwhile trust in the EU as such has declined dramatically (Traynor, 2013).

A second demand placed on a good standard: a new standard must not conflict with existing standards. It is more difficult to understand this requirement in the case of the euro than with technical standards, but it boils down to the fact that the euro can be seen as a “platform” that connects a network of supply with a network of demand (Eisenmann, 2008). The standardisation angle compels the observer to look at the euro within its wider context, as a module in a bigger system, and then to determine to what extent the other elements of that system, which varied per country, are being affected by the standardisation effort or are performing independently (de Vries, 1999, Chapter 13).

Then we should look at the supply side as well as the demand side. The supply side concerns the country’s production of goods and services, the demand side the customer demand for goods and services. In particular the foreign demand is important in relation to the currency: the value of a national currency reflects the strength of the economy. If a country is unable to produce goods or services competitively, then its exports will be smaller than its imports. Currency depreciation makes exports cheaper and imports more expensive, which provides an incentive for local producers to start making goods or services for the domestic market and later also for export markets. For now, the Southern European countries do not have the competitive strength to keep imports and exports in balance, while currency depreciation cannot come to their rescue. After all, the value of the euro is also determined by the performance of the stronger northern economies (Rodenburg and Zuidhof, 2012) which have a structural export surplus.

That does not have to be a problem if the strong parts of Europe provide structural support to the weaker ones, as happens within a country. So at the euro zone level, the criterion of non-conflicting standards asks for structural support of the South by the North and central coordination: a central monetary and financial policy. If that situation persisted, however, there would be no end to the amount of support required if the southern economies would not be strengthened – the relatively strong currency hinders export, and the continuous availability may dis-encourage rather than stimulate entrepreneurship and innovation. That calls for socioeconomic and innovation policies that may not have to be uniform in each and every country but do have to comply with European performance requirements. In the longer term, the strength of a country’s economy also hinges on the quality of its educational system, which therefore also needs Europe-wide quality control. Since we are also talking about budgetary discipline, at the end of the day the single currency is linked up with almost all national policy areas. Even then, it is the question if all countries can achieve the more or less common level. Finland, for instance, has Europe’s best education system (OECD, 2009) and is strong in innovation (European Union, 2012) – this provides them a sound basis for economic prosperity in the coming years. At the other side of the spectrum, Greece’s traditional export of citrus fruit has diminished in a growing market. Apparently the country has been outperformed by neighbouring country Turkey. Restoring the Greek strengths would require decades and is maybe an illusion. We can conclude that not meeting the second criterion for a good standard causes enormous problems for the euro zone and for the European Union as a whole.

The way out of the crisis – Two main alternatives

From the previous analysis we can conclude that safeguarding the stability of the euro requires as minimum that the EU

This package calls for a political union. The ramifications of having a euro, with its system-technical environment, have made it so that a single currency can only flourish in a unified state. In that case, the sovereignty of the EU member states would be reduced to a level that States have within the United States or Bundesländer have within Germany. That would not please everyone, to put it mildly. The States in the US and the Bundesländer have a common language, culture and history. That is much less so in Europe, and many EU member states would not abide by centrally adopted rules. Then a European “strong hand” would be needed, including a European police force. However, all of this would not contribute to the first criterion for a good standard: support from the stakeholders.

We thus seem to end up with the other alternative: discontinuing the euro and going back to national currencies. In standardisation terms: multiple designs (de Vries et al., 2011). If we wish to have a Europe that is a partnership between independent nations, than this is the only choice. A split-up between Northern Europe and Southern Europe offers no solution and is only a stopgap measure. It is only a matter of time before countries within these zones would start walking out of step and would then require a northern or southern unified state, respectively. It should be noted that, even without a common currency, European countries can still work closely together and that standardisation is an important tool to that end. Joint technical standards, for example, have greatly helped to create a single European market without barriers to trade: the same product meets the same criteria in all member states and does not need to be adjusted to local standards anymore. Having to use different currencies does considerably hamper trade and is a big step backward in this respect. The systems approach that can be used in standardisation (de Vries, 1999, Chapter 13) can again help to find a solution: at the interface between supply and demand there is not only the currency but an entire payment system. Having different currencies but common systems facilitates transactions to a large extent. In the case of cash-less transactions (thus, electronic money transfer), the technical systems can be standardised, for instance in the form of uniform payment cards (credit cards and debit cards). The only obstacle in the way of trade would then be currency fluctuations. Daily fluctuations can be avoided by coupling currencies to each other while maintaining the option of devaluation or revaluation of currencies at a certain moment.

Is the road back to national currencies still open? In standardisation terms, there is lock-in (Arthur, 1989, David, 1985, Sydow et al., 2009): the euro is deeply embedded in the financial systems of the countries but also in the mind-set of citizens, business people and politicians. Though the euro failed to bring benefits (the countries within the euro zone did not perform better than those outside it and continuing has high risks (Graafland, 2012)), this makes a return to national currencies a major conversion issue. Bootle (2012) describes how this might be done, though he focusses on one country leaving the euro zone. His first conclusion is that preparations should be done in secret. This is very difficult for one country but not feasible at all if more countries have to leave at the same moment in time. This makes his subsequent recommendations unrealistic as well. Moreover, he pays little attention to the technical side: computer systems, cashpoints, cash registers and suchlike have to be modified. This technical conversion is comparable to the one applied for the introduction of the euro. So that problem is solvable, but at a substantial price and cannot be realized overnight, when a rapid switchover is desirable given that uncertainty in the financial markets also affects the real economy. One option is to carry out the conversion sooner in an “administrative” sense, while temporarily continuing to make some payments in euros, until all the technical systems have been adjusted. But this, too, necessitates adjustments to computer systems and, as a consequence, a transitional period. That would be a turbulent period with a great deal of uncertainty about the exchange rates of the new currencies and – as a result of that uncertainty and loss of face on the part of Europe – a depreciation of the euro. To conclude, the second alternative as such is better, but lock –in made conversion to this solution problematic if not impossible.

Functional analysis – additional alternatives?

Let’s again go back to standardisation theory. A standard fulfils one or more functions (Kienzle, 1943; Susanto, 1988; Bouma, 1989; de Vries, 1988) and the optimal way to create a flexible architecture of standards that fits the architecture of the entities for which the standards are intended is achieved if one standard fulfils one function (Beitz, 1971; de Vries, 1999, Chapter 13). The euro actually fulfils two functions. First, it is a device to attach value to goods and services in order to enable exchange of goods and services between suppliers and customers. Second, it serves as a calculation basis for international trade in which the currency’s value in relation to other currencies represents the strength of the economy. An option could be to use national currencies for one function, and a common European currency for the other function.

In the years before the euro introduction, many European countries used fixed exchange rates between their national currencies. So they used national currencies for transactions but de facto their geographic area had a virtual common currency as there were no fluctuations in exchange rates between the national currencies. However, this is not a solution to the current crisis because the problem is not in the euro’s function as payment device but rather in its function in cross-border trade.

Let’s now examine the other option: the euro for payment within a country, national currencies as calculation basis for cross-border transactions. This option has been advocated by ten Dam (2011a; 2011b). He proposes introducing new national currencies for the calculation of prices and wages while maintaining the euro for money transfer including coins and electronic transfers. Then in a weak country like Greece, the salaries in euros would go down but the prices in the shops and the prices of export products as well. A problem with this solution is the willingness of companies and other trade partners to use it: why use national currencies and then accepting the uncertainties related to exchange rates while the single currency is still available? Therefore, this solution, by a relative outsider, is being presented as an alternative for all countries in the euro zone but it might rather serve as an in-between solution towards the best situation for Europe: without a single currency.

Transition from euro to national currencies

Indeed, this solution seems to provide European political leaders the opportunity to decide in one single meeting to return to the national currencies. Then during a transition period the new valuta can be produced and the computer systems etc. can be modified. Another question is whether all countries need to give up the euro at the same time or some countries are better off getting out earlier. In this respect, a joint European approach may seem to be preferable in order to have a transition that would be as orderly as possible. But this will lead to an enormous flow of money from ‘weak’ countries to countries that are perceived to be stronger because the new national currencies of those countries will have a higher value. Another option is therefore that individual countries leave the euro zone prematurely. Bootle (2012) and many others mention Greece to be the first candidate but Graafland (2012) shows that a ‘Grexit’ may have a knock-on effect leading to a total collapse of the European financial system followed by a collapse of the ‘real’ economy. Another option is that more prosperous countries would get back their strong currencies first. Then Finland is the first candidate because of the strength of its economy and its peripheric geographical position. Next, other small and relatively strong economies could follow: Austria and the Benelux countries Belgium, the Netherlands and Luxembourg, and subsequently big fish Germany. That would hinder their exports, but they could cope with that problem. The euro, as the currency of the remaining countries, would decrease in value, but that would benefit the economies of these countries. After all, the move would make it easier to export goods and services, while their outstanding debts would shrink in size. This approach has the risk of money flow towards the north as well but the – for the time being – remaining euro will be much stronger than the new drachme or other southern currency so there is less need for a money flow and more opportunity for recovery of southern economies.

Conclusion and discussion

In short, an analysis of the euro crisis from the perspective of standardisation shows that we can choose between two options: either a common currency in a European unified state or a return to national currencies. There is no compromise solution. Given the enormous drawbacks of the first option, the last one seems to be the most feasible one, despite the difficulty of overcoming the euro lock-in. the transition problem can be solved by distinguishing between the functions transaction payment and calculation-basis for cross-border money transfer: for the latter national currencies can be introduced at short notice, for the first a longer transition period is needed. The exercise might start in single Northern countries rather than in all countries at the same moment. Once the national currencies have been re-established, the countries may decide to have stable exchange rates until differences in national economies make it necessary to have a devaluation or revaluation.

Interestingly, these conclusions differ from what most economists support: continuing the euro, more central European power, maybe a Grexit. This may be explained by the mono-disciplinary character of economics (Dooyeweerd 1955, 1957): economic studies tend to pay less attention to technical systems (in this case both the national production systems in general and the technical systems related to money transfer are at stake) and to a longer term perspective. Standardisation research is multidisciplinary and as such widens the perspective. Of course, the euro crisis is more than a standardisation problem so a standardisation approach only is not sufficient. Therefore, solutions need to be worked out in greater detail by a multidisciplinary team of economists and other experts. That would enable politicians to make underpinned and sustainable choices rather than be swayed by the issues of the day.

Dr. ir. Henk J. de Vries, Rotterdam School of Management, Erasmus University Rotterdam