Populist parties all around Europe are questioning the value of the Euro and the supranational role of the European Union, more generally. The discussion is rarely in terms of economic analysis, but rather political tactics. Were you to ask the French presidential candidate Marine Le Pen whether the EU is an optimum currency area, she would (probably, I think) laugh in your face. In a best case scenario, she would argue that voters do not care directly about business cycle synchronization or convergence in terms of gross domestic product. These do not feature as central to the political debate, even if the EU has proven instrumental in promoting both at very little cost in terms of income inequality across the continent, as colleagues Alberto Alesina and Guido Tabellini and I show in a recent article .

Rather, Ms. Le Pen would probably posit that voters care about the growth in the purchasing power of their wages and the stability of the economic environment in which they transact. By focusing on issues of national control (“sovereignty” is the term most frequently employed) over monetary policy, anti-Euro parties promise to reignite wage growth and employment – both stagnating in the South of Europe and France – at no cost for economic or political stability.
But stability is a key word here.
Economic and political stability factor in whether we decide to purchase with sufficient peace of mind a new home or a car or to plan for that summer vacation. Hence, they matter for domestic consumption. They also matter for whether a small business decides to invest in new equipment or post a job vacancy for new employees.

Would a Europe without the single market and the Euro – because this is what we are truly talking about, not an exit by Italy or France, but the sure collapse of the single currency – provide such stability?
Even assuming any added volatility originating from a potential Euro breakup is zero – a very favorable scenario to those of us contemplating the value of a Euro break up – outside of the EU one could expect a country like Italy or Spain to revert to more volatile and less economically stable long-run equilibria. This is because we would be moving from a “large and open” economy to “small and open” economic framework. Economists Julian di Giovanni and Andrei Levchenko, among others, have shown that there is a clear association between trade openness and output growth volatility, especially in small open economies.

This link goes back at least to Dani Rodrik's famous research in the 1990s and countering economic uncertainty may mean bigger national governments . More volatility will likely require a larger role for national public sectors to insure and manage international risk. Just think about it. Can we can imagine even more government expansion in our already fiscally constrained Europe? Where are member countries going to carve out the fiscal space necessary to provide shelter from international shocks? Monetary policy flexibility alone will not be able to fix this issue.
And it is not like the rest of the world will offer a stable international trading counterparty in the medium-term future either. A geo-political environment of increasing uncertainty, with potential hot conflicts expanding or opening in Syria, Iran or North Korea, is on the horizon. This is not to mention Russia, the Middle East or the resurgence of the Taliban in Afghanistan, by the way.

All indicators available for Europe already signal that this uncertainty is growing and that we can expect to pay for it. The Monthly European Economic Policy Uncertainty Index in March 2017 was up 71 percent from March 2010. Further confirmation can be found looking at the VSTOXX futures term structure curve, which tentatively extrapolates measures of uncertainty from European stock markets.
French or Italian voters should ask themselves whether it is preferable to sail these rough seas as a nimble, but fragile unit or as part of a larger, more stable block. One may see benefits and costs in both strategies, but should be aware of the amount of risk massing up on the horizon and its costs

Francesco Trebbi
Professor of Economics
University of British Columbia

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