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Euro dodges new crisis with Macron win, but needs fixes

In this photo taken Friday, May 5, 2017, Vitor Rodrigues picks up a book titled "Vencer o Medo", or "To Defeat Fear", by union leader Manuel Carvalho da Silva, while posing for photos at his bookshop in Lisbon. Rodrigues remembers when they told him in the 1990s that the euro would bring affluence. The owner and only full-time employee of the Leituria bookstore said he believed it. (AP Photo/Armando Franca)

LISBON, Portugal (AP) — Vitor Rodrigues remembers when they told him in the 1990s that the euro would bring affluence. The owner and only full-time employee of the Leituria bookstore on a leafy street in Lisbon’s Estefania district says he believed it.

“Now I feel very disenchanted,” the 47-year-old says at his cash register. “The euro has served macro interests, not the man in the street. It’s been good for banks and for political careers but it hasn’t brought us any great benefits.”

The euro, the target of populist politicians who claim it has inflicted undue economic pain on Europeans, has a new lease on life after Emmanuel Macron, a firmly pro-euro moderate, won the French presidential election this week. His rival, the right-wing Marine Le Pen, had wanted to pull France out of the bloc, with likely painful consequences for the currency.

But even Macron acknowledges the need to strengthen and reform the euro. He will find it, however, an uphill battle.

There are political logjams making the currency more resistant to market crises and to end its most painful shortcoming — a reliance on crushing budget austerity to fix countries whose finances and economies run into trouble.

Countries that ran into heavy debt — Greece, Ireland, Portugal, Cyprus and Spain — got bailout loans from the other members in return for massive cuts to public spending. That caused job losses, pushed families into poverty and hurt company earnings.

It pitted creditor countries like Germany and the Netherlands against the often resentful debtors. And even countries like France or Italy, large economies that are struggling to grow but did not need bailouts, have had to focus on public spending cuts to meet euro rules.

The eurozone is growing and many of these economies are now doing better. The EU’s regular Eurobarometer poll shows 56 percent agree the euro is good for their country, with 33 percent saying it’s bad. Even in Greece and Portugal, majorities support the euro. But the brutal bailout experience has left the kind of disenchantment Rodrigues conveys.

He says he and people he knows have undergone years of steady erosion of their buying power. “Someone in an average job, say middle management, earns less now than they did before the euro,” he said.

Portugal hoped to graduate from being a low-wage economy with membership of the euro in 1999. But the low interest rates that came with its linkage to stronger economies like Germany invited overspending. Portugal dug itself deep into debt and needed a 78-billion-euro bailout in 2011.

Portugal’s finances are healing, but only after years of cutbacks, including wage freezes and pension cuts. The average monthly salary in the private sector, also before tax, is around 1,100 euros ($1,200).

Worst hit has been Greece, which saw its economy shrink by a quarter. Shuttered storefronts litter downtown Athens. Whole families can be seen lining up for free meals at a growing number of soup kitchens.

What went wrong? When trouble arrived, member countries found that joining the euro had taken away important safety valves. They could not let their currency fall in value to make themselves more competitive in international trade. And there was no large central treasury to even out recessions.

Roberto Gualtieri, who chairs the committee on economic and monetary affairs in the European Parliament, thinks the need for new steps is widely enough recognized that action could follow the German election in September.

“I hope that after this electoral cycle, we will have the political conditions for providing more investments, more reforms, and better and more completed economic and monetary union,” Gaultieri told The Associated Press. “The great victory of Macron is an encouraging signal in this direction.”

There already have been a few fixes. Supervision of the biggest banks was toughened by handing it to the European Central Bank, to prevent the cost of bailing them out from forcing governments to require bailouts themselves, as in Ireland’s case. The European Central Bank took market pressure off government finances by offering to buy the bonds of governments facing excessive borrowing costs. Member countries set up a bailout fund, the European Stability Mechanism.

So far, the 19 governments have not been willing to go farther. In particular, the idea of giving the European Union central taxing and spending authority remains anathema to Germany, the biggest and most politically powerful member. Germans don’t want to get the bill for other countries’ troubles in a so-called “transfer union.” Their view is that countries that want more growth can do what Germany did in 2004: pass tough, pro-business reforms that cut long-term jobless benefits and made temporary work arrangements easier.

So what’s the answer? One proposal is to add EU-wide deposit insurance. That would add more insulation against bank crises and market panic. Another is some more limited form of central fiscal help — such as EU-wide unemployment insurance that would automatically provide collective assistance when recession strikes an individual country.

Gualtieri says the first step is to avoid reducing deficits too aggressively and to take a more balanced approach that would include more investment spending — and then tackle improvements to the make-up of the euro.

The euro’s “current construction is clearly suboptimal, but I disagree with those who consider it structurally unsustainable and permanently on the verge of collapse,” he said. “I have seen in the recent years many predictions about the imminent dissolution of the euro, and they have always proven to be wrong.”

EU jobless insurance, for instance, could provide a crisis cushion but avoid permanent transfers by requiring the assisted country to pay the money back over time once the economy improves. The EU policy-making process could take up deposit insurance again after the German election.

“A healthy euro is in Germany’s interest, it is in everyone’s interest,” Gualtieri said. “We are not asking anyone to pay… We could do far better and we should do better.”

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McHugh reported from Frankfurt, Germany.

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