SOMETHING peculiarly apt about the fact that the current
European crisis began in Greece.
For Europe’s woes have all the aspects of a
classical Greek tragedy, in which a man of noble character is undone by the
fatal flaw of hubris.
long ago Europeans could, with considerable justification, say that the current
economic crisis was actually demonstrating the advantages of their economic and
social model. Like the United States,
Europe suffered a severe slump in the wake of the global financial meltdown;
but the human costs of that slump seemed far less in Europe than in America.
much of Europe, rules governing worker firing
helped limit job loss, while strong social-welfare programs ensured that even
the jobless retained their health care and received a basic income. Europe’s gross domestic product might have
fallen as much as ours, but the Europeans weren’t suffering anything like the
same amount of misery. And the truth is that they still aren’t.
Yet Europe is in
deep crisis — because its proudest achievement,
the single currency adopted by most European nations, is now in danger. More
than that, it’s looking increasingly like a trap. Ireland,
hailed as the Celtic Tiger
not so long ago, is now struggling to avoid bankruptcy. Spain,
booming economy until recent years, now has 20 percent unemployment and faces
the prospect of years of painful, grinding deflation.
tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and
noble undertaking: the generations-long effort to bring peace, democracy and
shared prosperity to a once and frequently war-torn continent. But the
architects of the euro, caught up in their project’s sweep and romance, chose
to ignore the mundane difficulties a shared currency would predictably
encounter — to ignore warnings, which were issued right from the beginning,
that Europe lacked the institutions needed to make a common currency workable.
Instead, they engaged in magical thinking, acting as if the nobility of their
mission transcended such concerns.
result is a tragedy not only for Europe but also for the world, for which Europe is a crucial
role model. The Europeans have shown
us that peace and unity can be brought to a region with a history of violence,
and in the process they have created perhaps the most decent societies in human
history, combining democracy and human rights with a level of individual
economic security that America
comes nowhere close to matching. These achievements are now in the process of
being tarnished, as the European dream turns into a nightmare for all too many
people. How did that happen?
ROAD TO THE EURO
It all began with coal and steel. On May 9, 1950 — a date whose anniversary is
now celebrated as Europe Day — Robert Schuman, the French foreign minister,
proposed that his nation and West
Germany pool their coal and steel
production. That may sound prosaic, but Schuman declared that it was much more
than just a business deal.
thing, the new Coal and Steel Community would make any future war between Germany
and France “not merely unthinkable,
materially impossible.” And it would be a first step on the road to a
“federation of Europe,” to be achieved step by
step via “concrete achievements which first create a de facto solidarity.” That
is, economic measures would both serve mundane ends and promote political
Coal and Steel Community eventually evolved into a customs union within which
all goods were freely traded. Then, as democracy spread within Europe, so did Europe’s
unifying economic institutions. Greece, Spain
and Portugal were brought in
after the fall of their dictatorships; Eastern Europe
after the fall of Communism.
1980s and ’90s this “widening” was accompanied by “deepening,” as Europe set
about removing many of the remaining obstacles to full economic integration.
(Eurospeak is a distinctive dialect, sometimes hard to understand without
subtitles.) Borders were opened; freedom of personal movement was guaranteed;
and product, safety and food regulations were harmonized, a process
immortalized by the Eurosausage episode of the TV show “Yes Minister,” in which
the minister in question is told that under new European rules, the traditional
British sausage no longer qualifies as a sausage and must be renamed the
Emulsified High-Fat Offal Tube. (Just to be clear, this happened only on TV.)
creation of the euro was proclaimed the logical next step in this process. Once
again, economic growth would be fostered with actions that also reinforced
advantages of a single European currency were obvious. No more need to change
money when you arrived in another country; no more uncertainty on the part of
importers about what a contract would actually end up costing or on the part of
exporters about what promised payment would actually be worth. Meanwhile, the
shared currency would strengthen the sense of European unity. What could go
answer, unfortunately, was that currency unions have costs as well as benefits.
And the case for a single European currency was much weaker than the case for a
single European market — a fact that European leaders chose to ignore.
(UNEASY) CASE FOR MONETARY UNION
International monetary economics is, not surprisingly, an area of frequent
disputes. As it happens, however, these disputes don’t line up across the usual
ideological divide. The hard right often favors hard money — preferably a gold
standard — but left-leaning European politicians have been enthusiastic
proponents of the euro. Liberal American economists, myself included, tend to
favor freely floating national currencies that leave more scope for activist
economic policies — in particular, cutting interest rates and increasing the
money supply to fight recessions. Yet the classic argument for flexible
exchange rates was made by none other than Milton Friedman.
case for a transnational currency is, as we’ve already seen, obvious: it makes
doing business easier. Before the euro was introduced, it was really anybody’s
guess how much this ultimately mattered: there were relatively few examples of
countries using other nations’ currencies. For what it was worth, statistical
analysis suggested that adopting a common currency had big effects on trade,
which suggested in turn large economic gains. Unfortunately, this optimistic
assessment hasn’t held up very well since the euro was created: the best
estimates now indicate that trade among euro nations is only 10 or 15 percent
larger than it would have been otherwise. That’s not a trivial number, but
neither is it transformative.
there are obviously benefits from a currency union. It’s just that there’s a
downside, too: by giving up its own currency, a country also gives up economic
that you’re a country that, like Spain
today, recently saw wages and
prices driven up by a housing boom, which then went bust. Now you need to get
those costs back down. But getting wages and prices to fall is tough: nobody
wants to be the first to take a pay cut, especially without some assurance that
prices will come down, too. Two years of intense suffering have brought Irish
wages down to some extent, although Spain
have barely begun the process. It’s a nasty affair, and as we’ll see later,
cutting wages when you’re awash in debt creates new problems.
still have your own currency, however, you wouldn’t have to go through the
protracted pain of cutting wages: you could just devalue your currency — reduce
its value in terms of other currencies — and you would effect a de facto wage
workers reject de facto wage cuts via devaluation just as much as explicit cuts
in their paychecks? Historical experience says no. In the current crisis, it
two years of severe unemployment to achieve about a 5 percent reduction in
average wages. But in 1993 a devaluation of the Irish punt brought an instant
10 percent reduction in Irish wages measured in German currency.
difference? Back in 1953, Milton Friedman offered an analogy: daylight saving
time. It makes a lot of sense for businesses to open later during the winter
months, yet it’s hard for any individual business to change its hours: if you
operate from 10 to 6 when everyone else is operating 9 to 5, you’ll be out of
sync. By requiring that everyone shift clocks back in the fall and forward in
the spring, daylight saving time obviates this coordination problem. Similarly,
Friedman argued, adjusting your currency’s value solves the coordination
problem when wages and prices are out of line, sidestepping the unwillingness
of workers to be the first to take pay cuts.
while there are benefits of a common currency, there are also important
potential advantages to keeping your own currency. And the terms of this
trade-off depend on underlying conditions.
side, the benefits of a shared currency depend on how much business would be
of this as the Iceland-Brooklyn issue. Iceland,
with only 320,000 people,
has its own currency — and that fact has given it valuable room for maneuver.
So why isn’t Brooklyn, with roughly eight times Iceland’s
population, an even
better candidate for an independent currency? The answer is that Brooklyn,
located as it is in the middle of metro New York
rather than in the middle of the Atlantic, has
an economy deeply enmeshed with those of neighboring boroughs. And Brooklyn
residents would pay a large price if they had to change currencies every time
they did business in Manhattan or Queens.
countries that do a lot of business with one another may have a lot to gain
from a currency union.
other hand, as Friedman pointed out, forming a currency union means sacrificing
flexibility. How serious is this loss? That depends. Let’s consider what may at
first seem like an odd comparison between two small, troubled economies.
scenery and history aside, the nation of Ireland
and the state of Nevada
have much in common. Both are small economies of a few million people highly
dependent on selling goods and services to their neighbors. (Nevada’s
neighbors are other U.S. states,
other European nations, but the economic implications are much the same.) Both
were boom economies for most of the past decade. Both had huge housing bubbles,
which burst painfully. Both are now suffering roughly 14 percent unemployment.
And both are members of larger currency unions: Ireland
is part of the euro zone, Nevada part of the dollar zone, otherwise known as
the United States of America.
situation is much less desperate than Ireland’s.
of all, the fiscal side of the crisis is less serious in Nevada.
It’s true that budgets in both Ireland and Nevada have been hit extremely hard by the
slump. But much of the spending Nevada
residents depend on comes from federal, not state, programs. In particular,
retirees who moved to Nevada for the sunshine don’t have to worry that the
state’s reduced tax take will endanger their Social Security checks or their Medicare coverage. In Ireland, by
contrast, both pensions and health spending are on the cutting block.
Also, Nevada, unlike
doesn’t have to worry about the cost of bank bailouts, not because the state
has avoided large loan losses but because those losses, for the most part,
problem. Thus Nevada accounts for a disproportionate share of the losses
incurred by Fannie Mae and Freddie Mac, the
government-sponsored mortgage companies — losses that, like Social Security and
Medicare payments, will be covered by Washington, not Carson City.
there’s one more advantage to being a U.S. state: it’s likely that Nevada’s
unemployment problem will be greatly alleviated over the next few years by
out-migration, so that even if the lost jobs don’t come back, there will be
fewer workers chasing the jobs that remain. Ireland
will, to some extent, avail itself of the same safety valve, as Irish citizens
leave in search of work elsewhere and workers who came to Ireland
the boom years depart. But Americans are extremely mobile; if historical
patterns are any guide, emigration will bring Nevada’s
unemployment rate back in line with the U.S.
average within a few years, even if job growth in Nevada
continues to lag behind growth in the
nation as a whole.
all, then, even as both Ireland
and Nevada have been especially hard-luck
cases within their respective currency zones, Nevada’s
medium-term prospects look much
does this have to do with the case for or against the euro? Well, when the
single European currency was first proposed, an obvious question was whether it
would work as well as the dollar does here in America.
And the answer, clearly,
was no — for exactly the reasons the Ireland-Nevada comparison illustrates. Europe
isn’t fiscally integrated: German taxpayers don’t
automatically pick up part of the tab for Greek pensions or Irish bank
bailouts. And while Europeans have the legal right to move freely in search of
jobs, in practice imperfect cultural integration — above all, the lack of a
common language — makes workers less geographically mobile than their American
you see why many American (and some British) economists have always been
skeptical about the euro project. U.S.-based economists had long emphasized the
importance of certain preconditions for currency union — most famously, Robert
Mundell of Columbia stressed the importance of
labor mobility, while Peter Kenen, my colleague at Princeton,
emphasized the importance of fiscal integration. America,
we know, has a currency
union that works, and we know why it works: because it coincides with a nation
— a nation with a big central government, a common language and a shared
culture. Europe has none of these things,
which from the beginning made the prospects of a single currency dubious.
observations aren’t new: everything I’ve just said was well known by 1992, when
the Maastricht Treaty set the euro project in motion. So why did the project
proceed? Because the idea of the euro had gripped the imagination of European
elites. Except in Britain, where Gordon Brown persuaded Tony Blair not to join, political leaders throughout Europe were
caught up in the romance of the project, to such an extent that anyone who
expressed skepticism was considered outside the mainstream.
the ’90s, people who were present told me that staff members at the European Commission were initially
instructed to prepare reports on the costs and benefits of a single currency —
but that after their superiors got a look at some preliminary work, those
instructions were altered: they were told to prepare reports just on the
benefits. To be fair, when I’ve told that story to others who were senior
officials at the time, they’ve disputed that — but whoever’s version is right,
the fact that some people were making such a claim captures the spirit of the
euro, then, would proceed. And for a while, everything seemed to go well.
The euro officially came into existence on Jan. 1, 1999. At first it was a
virtual currency: bank accounts and electronic transfers were denominated in
euros, but people still had francs, marks and lira (now considered
denominations of the euro) in their wallets. Three years later, the final
transition was made, and the euro became Europe’s
transition was smooth: A.T.M.’s and cash registers were converted swiftly and
with few glitches. The euro quickly became a major international currency: the
euro bond market soon came to rival the dollar bond market; euro bank notes
began circulating around the world. And the creation of the euro instilled a
new sense of confidence, especially in those European countries that had
historically been considered investment risks. Only later did it become
apparent that this surge of confidence was bait for a dangerous trap.
Greece, with its long
history of debt defaults and bouts of high inflation, was the most striking
example. Until the late 1990s, Greece’s
fiscal history was reflected in its bond yields: investors would buy bonds
issued by the Greek government only if they paid much higher interest than
bonds issued by governments perceived as safe bets, like those by Germany.
euro’s debut approached, however, the risk premium on Greek bonds melted away.
After all, the thinking went, Greek debt would soon be immune from the dangers
of inflation: the European Central Bank would see to
that. And it wasn’t possible to imagine any member of the newly minted monetary
union going bankrupt, was it?
by the middle of the 2000s just about all fear of country-specific fiscal woes
had vanished from the European scene. Greek bonds, Irish bonds, Spanish bonds,
Portuguese bonds — they all traded as if they were as safe as German bonds. The
aura of confidence extended even to countries that weren’t on the euro yet but
were expected to join in the near future: by 2005, Latvia,
which at that point hoped to adopt the euro by 2008, was able to borrow almost
as cheaply as Ireland.
(Latvia’s switch to the euro
has been put off for now, although neighboring Estonia
joined on Jan. 1.)
interest rates converged across Europe, the
formerly high-interest-rate countries went, predictably, on a borrowing spree.
(This borrowing spree was, it’s worth noting, largely financed by banks in
Germany and other traditionally low-interest-rate countries; that’s why the
current debt problems of the European periphery are also a big problem for the
European banking system as a whole.) In Greece
it was largely the
government that ran up big debts. But elsewhere, private players were the big
as I’ve already noted, had a huge real estate boom: home prices rose 180
percent from 1998, just before the euro was introduced, to 2007. Prices in Spain
almost as much. There were booms in those not-yet-euro nations, too: money
flooded into Estonia, Latvia,
Bulgaria and Romania.
a heady time, and not only for the borrowers. In the late 1990s, Germany’s
economy was depressed as a result of low demand from domestic consumers. But it
recovered in the decade that followed, thanks to an export boom driven by its
European neighbors’ spending sprees.
in short, seemed to be going swimmingly: the euro was pronounced a great
the bubble burst.
still hear people talking about the global economic crisis of 2008 as if it
were something made in America.
But Europe deserves equal billing. This was,
if you like, a North Atlantic crisis, with not much to choose between the
messes of the Old World and the New. We had
our subprime borrowers, who either chose to take on or were misled into taking
on mortgages too big for their incomes; they had their peripheral economies,
which similarly borrowed much more than they could really afford to pay back.
In both cases, real estate bubbles temporarily masked the underlying
unsustainability of the borrowing: as long as housing prices kept rising,
borrowers could always pay back previous loans with more money borrowed against
their properties. Sooner or later, however, the music would stop. Both sides of
the Atlantic were accidents waiting to happen.
In Europe, the
first round of damage came from the collapse
of those real estate bubbles, which devastated employment in the peripheral
economies. In 2007, construction accounted for 13 percent of total employment
in both Spain and Ireland,
more than twice as much as in the United States.
So when the building booms came to a screeching halt, employment crashed.
Overall employment fell 10 percent in Spain
and 14 percent in Ireland;
the Irish situation would be the equivalent of losing almost 20 million jobs
that was only the beginning. In late 2009, as much of the world was emerging
from financial crisis, the European crisis entered a new phase. First Greece,
then Spain and Portugal
suffered drastic losses in investor confidence and hence a significant rise in
borrowing costs. Why?
story is straightforward: the government behaved irresponsibly, lied about it
and got caught. During the years of easy borrowing, Greece’s
ran up a lot of debt — more than it admitted. When the government changed hands
in 2009, the accounting fictions came to light; suddenly it was revealed that Greece
a much bigger deficit and substantially more debt than anyone had realized.
Investors, understandably, took flight.
an unrepresentative case. Just a few years ago Spain,
by far the largest of the crisis economies, was a model European citizen, with
a balanced budget and public debt only about half as large, as a percentage of
G.D.P., as that of Germany.
The same was true for Ireland.
So what went wrong?
there was a large direct fiscal hit from the slump. Revenue plunged in both Spain
and Ireland, in part because tax
receipts depended heavily on real estate transactions. Meanwhile, as
unemployment soared, so did the cost of unemployment benefits — remember, these
are European welfare states, which have much more extensive programs to shield
their citizens from misfortune than we do. As a result, both Spain and
Ireland went from budget surpluses
on the eve of the crisis to huge budget deficits by 2009.
there were the costs of financial clean-up. These have been especially
crippling in Ireland,
where banks ran wild in the boom years (and were allowed to do so thanks to
close personal and financial ties with government officials). When the bubble
burst, the solvency of Irish banks was immediately suspect. In an attempt to
avert a massive run on the financial system, Ireland’s
government guaranteed all
bank debts — saddling the government itself with those debts, bringing its own
solvency into question. Big Spanish banks were well regulated by comparison,
but there was and is a great deal of nervousness about the status of smaller
savings banks and concern about how much the Spanish government will have to spend
to keep these banks from collapsing.
this helps explain why lenders have lost faith in peripheral European
economies. Still, there are other nations — in particular, both the United States
— that have been running deficits that, as a percentage of G.D.P., are
comparable to the deficits in Spain
Yet they haven’t suffered a comparable loss of lender confidence. What is
different about the euro countries?
possible answer is “nothing”: maybe one of these days we’ll wake up and find
that the markets are shunning America,
just as they’re shunning Greece.
But the real answer is probably more systemic: it’s the euro itself that makes Spain
and Ireland so vulnerable. For
membership in the euro means that these countries have to deflate their way
back to competitiveness, with all the pain that implies.
trouble with deflation isn’t just the coordination problem Milton Friedman
highlighted, in which it’s hard to get wages and prices down when everyone
wants someone else to move first. Even when countries successfully drive down
wages, which is now happening in all the euro-crisis countries, they run into
another problem: incomes are falling, but debt is not.
American economist Irving Fisher pointed out almost 80 years ago, the collision
between deflating incomes and unchanged debt can greatly worsen economic
downturns. Suppose the economy slumps, for whatever reason: spending falls and
so do prices and wages. But debts do not, so debtors have to meet the same
obligations with a smaller income; to do this, they have to cut spending even
more, further depressing the economy. The way to avoid this vicious circle,
Fisher said, was monetary expansion that heads off deflation. And in America
and Britain, the Federal Reserve and the Bank of England, respectively, are trying to do just that.
But Greece, Spain and
Ireland don’t have that option —
they don’t even have their own monies, and in any case they need deflation to
get their costs in line.
there’s a crisis. Over the course of the past year or so, first Greece,
then Ireland, became caught up in a
vicious financial circle: as potential lenders lost confidence, the interest
rates that they had to pay on the debt rose, undermining future prospects,
leading to a further loss of confidence and even higher interest rates.
Stronger European nations averted an immediate implosion only by providing Greece
and Ireland with emergency credit
lines, letting them bypass private markets for the time being. But how is this
all going to work out?
Some economists, myself included, look at Europe’s woes and have the feeling
that we’ve seen this movie before, a decade ago on another continent —
specifically, in Argentina.
never gave up its own currency, but in 1991 it did the next best thing: it
rigidly pegged its currency to the U.S. dollar, establishing a “currency board”
in which each peso in circulation was backed by a dollar in reserves. This was
supposed to prevent any return to Argentina’s
old habit of covering
its deficits by printing money. And for much of the 1990s, Argentina
rewarded with much lower interest rates and large inflows of foreign capital.
slid into a persistent recession and lost investor confidence. Argentina’s
government tried to restore that confidence through rigorous fiscal orthodoxy,
slashing spending and raising taxes. To buy time for austerity to have a
positive effect, Argentina
sought and received large loans from the International Monetary Fund — in much the
same way that Greece and Ireland
sought emergency loans from their neighbors. But the persistent decline of the
Argentine economy, combined with deflation, frustrated the government’s
efforts, even as high unemployment led to growing unrest.
early 2002, after angry demonstrations and a run on the banks, it had all
fallen apart. The link between the peso and the dollar collapsed, with the peso
plunging; meanwhile, Argentina
defaulted on its debts, eventually paying only about 35 cents on the dollar.
hard to avoid the suspicion that something similar may be in the cards for one
or more of Europe’s problem economies. After
all, the policies now being undertaken by the crisis countries are,
qualitatively at least, very similar to those Argentina tried in its desperate
effort to save the peso-dollar link: harsh fiscal austerity in an effort to
regain the market’s confidence, backed in Greece and Ireland by official loans
intended to buy time until private lenders regain confidence. And if an Argentine-style
outcome is the end of the line, it will be a terrible blow to the euro project.
Is that what’s going to happen?
necessarily. As I see it, there are four ways the European crisis could play
out (and it may play out differently in different countries). Call them
toughing it out; debt restructuring; full Argentina;
and revived Europeanism.
it out: Troubled European economies could, conceivably, reassure creditors by
showing sufficient willingness to endure pain and thereby avoid either default
or devaluation. The role models here are the Baltic nations: Estonia, Lithuania
These countries are small and poor by European standards; they want very badly
to gain the long-term advantages they believe will accrue from joining the euro
and becoming part of a greater Europe. And so
they have been willing to endure very harsh fiscal austerity while wages
gradually come down in the hope of restoring competitiveness — a process known
in Eurospeak as “internal devaluation.”
these policies been successful? It depends on how you define “success.” The
Baltic nations have, to some extent, succeeded in reassuring markets, which now
consider them less risky than Ireland,
let alone Greece.
Meanwhile, wages have come down, declining 15 percent in Latvia and more
than 10 percent in Lithuania and Estonia. All of this has, however,
come at immense cost: the Baltics have experienced Depression-level declines in
output and employment. It’s true that they’re now growing again, but all
indications are that it will be many years before they make up the lost ground.
something about the current state of Europe
that many officials regard the Baltics as a success story. I find myself
quoting Tacitus: “They make a desert and call it peace” — or, in this case,
adjustment. Still, this is one way the euro zone could survive intact.
restructuring: At the time of writing, Irish 10-year bonds were
yielding about 9 percent, while Greek 10-years were yielding 12½ percent. At
the same time, German 10-years — which, like Irish and Greek bonds, are
denominated in euros — were yielding less than 3 percent. The message from the
markets was clear: investors don’t expect Greece
to pay their debts in full. They are, in other words, expecting some kind of
debt restructuring, like the restructuring that reduced Argentina’s
debt by two-thirds.
debt restructuring would by no means end a troubled economy’s pain. Take Greece:
the government were to repudiate all its debt, it would still have to slash
spending and raise taxes to balance its budget, and it would still have to
suffer the pain of deflation. But a debt restructuring could bring the vicious
circle of falling confidence and rising interest costs to an end, potentially
making internal devaluation a workable if brutal strategy.
I find it hard to see how Greece
can avoid a debt restructuring, and Ireland
isn’t much better. The real
question is whether such restructurings will spread to Spain and —
the truly frightening prospect — to Belgium and Italy, which are heavily indebted
but have so far managed to avoid a serious crisis of confidence.
didn’t simply default on its foreign debt; it also abandoned its link to the
dollar, allowing the peso’s value to fall by more than two-thirds. And this
devaluation worked: from 2003 onward, Argentina
experienced a rapid
export-led economic rebound.
European country that has come closest to doing an Argentina
whose bankers had run up foreign debts that were many times its national
income. Unlike Ireland,
which tried to salvage its banks by guaranteeing their debts, the Icelandic
government forced its banks’ foreign creditors to take losses, thereby limiting
its debt burden. And by letting its banks default, the country took a lot of
foreign debt off its national books.
same time, Iceland
took advantage of the fact that it had not joined the euro and still had its
own currency. It soon became more competitive by letting its currency drop
sharply against other currencies, including the euro. Iceland’s
and prices quickly fell about 40 percent relative to those of its trading
partners, sparking a rise in exports and fall in imports that helped offset the
blow from the banking collapse.
combination of default and devaluation has helped Iceland
limit the damage from its
banking disaster. In fact, in terms of employment and output, Iceland has
done somewhat better than Ireland and
much better than the Baltic nations.
one or more troubled European nations go down the same path? To do so, they
would have to overcome a big obstacle: the fact that, unlike Iceland,
no longer have their own currencies. As Barry Eichengreen of Berkeley
pointed out in an influential 2007
analysis, any euro-zone country that even hinted at leaving the currency would
trigger a devastating run on its banks, as depositors rushed to move their
funds to safer locales. And Eichengreen concluded that this “procedural”
obstacle to exit made the euro irreversible.
to the dollar was also supposed to be irreversible, and for much the same
reason. What made devaluation possible, in the end, was the fact that there was
a run on the banks despite the government’s insistence that one peso would
always be worth one dollar. This run forced the Argentine government to limit
withdrawals, and once these limits were in place, it was possible to change the
peso’s value without setting off a second run. Nothing like that has happened
in Europe — yet. But it’s certainly within the
realm of possibility, especially as the pain of austerity and internal
devaluation drags on.
Europeanism: The preceding three scenarios were grim. Is there any hope of an
outcome less grim? To the extent that there is, it would have to involve taking
further major steps toward that “European federation” Robert Schuman wanted 60
early December, Jean-Claude Juncker, the prime minister of Luxembourg, and
Giulio Tremonti, Italy’s finance minister, created a storm with a proposal to
create “E-bonds,” which would be issued by a European debt agency at the behest
of individual European countries. Since these bonds would be guaranteed by the European Union as a whole,
they would offer a way for troubled economies to avoid vicious circles of
falling confidence and rising borrowing costs. On the other hand, they would
potentially put governments on the hook for one another’s debts — a point that
furious German officials were quick to make. The Germans are adamant that Europe must not
become a “transfer union,” in which
stronger governments and nations routinely provide aid to weaker.
the earlier Ireland-Nevada comparison shows, the United States
works as a currency
union in large part precisely because it is also a transfer union, in which
states that haven’t gone bust support those that have. And it’s hard to see how
the euro can work unless Europe finds a way to
accomplish something similar.
is yet proposing that Europe move to anything resembling U.S.
integration; the Juncker-Tremonti plan would be at best a small step in that
direction. But Europe doesn’t seem ready to
take even that modest step.
OF MANY, ONE?
For now, the plan in Europe is to have everyone tough it out — in effect, for Greece,
Portugal and Spain to
That was the clear verdict of the most recent meeting of the European Council,
at which Angela Merkel, the German chancellor, essentially got everything
she wanted. Governments that can’t borrow on the private market will receive
loans from the rest of Europe — but only on stiff terms: people talk about Ireland getting
a “bailout,” but it has to pay almost 6 percent interest on that emergency
loan. There will be no E-bonds; there will be no transfer union.
this eventually works in the sense that internal devaluation has worked in the
Baltics — that is, in the narrow sense that Europe’s troubled economies avoid
default and devaluation — it will be an ugly process, leaving much of Europe deeply
depressed for years to come. There will be
political repercussions too, as the European public sees the continent’s
institutions as being — depending on where they sit — either in the business of
bailing out deadbeats or acting as agents of heartless bill collectors.
the rest of the world look on smugly at Europe’s
woes. Taken as a whole, the European Union, not the United
States, is the world’s largest economy; the European
Union is fully coequal with America
in the running of the global trading system; Europe is the world’s most
important source of foreign aid; and Europe
is, whatever some Americans may think, a crucial partner in the fight against
terrorism. A troubled Europe is bad for
case, the odds are that the current tough-it-out strategy won’t work even in
the narrow sense of avoiding default and devaluation — and the fact that it
won’t work will become obvious sooner rather than later. At that point, Europe’s
stronger nations will have to make a choice.
been 60 years since the Schuman declaration started Europe
on the road to greater unity. Until now the journey along that road, however
slow, has always been in the right direction. But that will no longer be true
if the euro project fails. A failed euro wouldn’t send Europe
back to the days of minefields and barbed wire — but it would represent a
possibly irreversible blow to hopes of true European federation.
Europe’s strong nations let that happen? Or
will they accept the responsibility, and possibly the cost, of being their
neighbors’ keepers? The whole world is
waiting for the answer.