Global Economy: Can the Euro Be Saved?

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It’s an old European habit: persist in a long period of denial and then, finally, try to appease the aggressor and buy him off. Which, of course, never works. Nor is it likely to work now. The nearly trillion-dollar euro-rescue package announced this week is an impressive ratcheting up of unity by European governments. But it hardly touches the underlying tensions that continue to tear at the euro zone.

Is it unfair—even outrageous—to compare the current euro rescue to Neville Chamberlain’s pathetic efforts in the 1930s to appease Adolf Hitler (and by implication to liken global financial markets to the Nazis)? Yeah, it is, but maybe not as outrageous as you think. After all, Hitler was always the ghost in the machinery of Maastricht. To a degree that most Europeans would prefer to forget, the main impetus for the European Monetary Union came out of the two world wars. European leaders knew they had to unite and enfold the continent’s largest economy, Germany’s, into that union, because after starting two horrific wars in the last century the Germans could not be trusted to stand alone any longer. The Germans also knew they had to be saved from themselves, a line that was often heard from then-chancellor Helmut Kohl as he pushed relentlessly for EMU in the 1990s.

Today EMU remains at heart a political, not an economic, entity. And if the euro is to be ultimately rescued it will be through a political solution, one that European governments are still barely willing to discuss. Germany continues to be the wild card. It was only with the greatest reluctance that the Germans gave up their strong Deutsche mark in 1999, but they knew that to keep it and reject EMU would summon up those awful specters of nationalism from the 20th century. Yet the specters are still there. They are finding a voice once again in the German political backlash against Chancellor Angela Merkel, who has bravely squelched Berlin’s traditional resistance to the fiscal coddling of Germany’s more lax southern neighbors, mainly Greece, Italy, Portugal, and Spain. Already four elderly German professors who have brought previous cases to the European Constitutional Court are said to be readying another one, claiming that this week’s rescue plan violates the euro-zone rules, which forbid national bailouts.

The political issues are long familiar to Euroskeptics. More than a decade after the advent of the euro—and nearly two decades after the signing of the Maastricht Treaty in February 1992—the European Union isn’t that much closer to becoming the “United States of Europe” than it was at the start. Yes, there is a supranational Parliament in Brussels and common (and increasingly influential) ministers for foreign policy and military and judicial cooperation. But these officials still pale in stature next to their national counterparts, and Europe remains a stubbornly patriotic pastiche of unchanging, and often opposed, cultures and societies. There is no mechanism for pan-European fiscal policy, even as individual members like Greece have no ability to use monetary policy or devalue because that is in the hands of the European Central Bank. There is no enforcing mechanism to stop governments from running up big budget deficits and national debt, even though the rules of Maastricht and the Stability and Growth Pact of 1997 say they shouldn’t. (There was an EMU entry requirement, but we’ve since learned that Greece and Italy probably lied their way in by disguising their debt, helped by Wall Street derivatives deals.) Led by the (relatively) fiscally disciplined Germans, the Northern European members show almost no popular support for continuing to transfer money to the southern members and rescue them.

EMU remains, as Henry James once said of 19th-century Russian novels, a “loose, baggy monster.” And markets eat monsters like this for breakfast.

The essential problem here is that the euro zone can’t be allowed to fail, and yet, according to the rules of economics and the seemingly intractable realities of European politics, the euro zone should fail. What to do? There are really only two broad ways out, in my view. The first would require brave European statesmen to be willing to sacrifice their national careers (you may have to take this further, Frau Merkel) in order to breach the final walls of European chauvinism. That in turn would mean building beyond the impressive but still insufficient new role announced for the ECB—that lender of last resort through purchases of weaker government bonds (which the ECB originally said it wouldn’t do)—and talking about real coordination of fiscal and spending policies, along with an enforcement mechanism to go with it. For national politicians to surrender their fiscal autonomy along with monetary policy would mean almost certain political suicide, but hey, what can you say: this generation of European politicians may have a rendezvous with destiny. The Stability and Growth Pact was a mere half-step in this direction, and it didn’t contain automatic fines for breaches of fiscal discipline (as the Germans wanted).

The second route is to start talking about creating second-class citizens within Euroland: restructuring and default for some of the weak southern sisters, ouster from the zone, or at least two classes of euros (which, for governments like Greece’s, would be almost like going back to the drachma anyway).

Unless something as fundamental as these alternatives is done, the euro is likely to continue to be a money pit. And European politicians will continue to remind a few of us of Neville Chamberlain.

Michael Hirsh is also the author of At War with Ourselves: Why America Is Squandering Its Chance to Build a Better World.

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