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The euro crisis, explained

By Michael Goldfarb

Created 1969-12-31 20:00

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The euro crisis, explained

Michael Goldfarb [2]December 16, 2010 07:01Updated December 16, 2010 17:46History of European integration explains why single currency is in current troubled state.

Editor's note: European leaders meeting in Brussels today agreed to create a permanent

support fund[3] for the euro, a first step they hope in calming market jitters over the

plight of Europe's single currency.

LONDON, United Kingdom This is the story of the euro and the economic crisisoverwhelming the periphery of the eurozone the main subject of a European Unionsummit meeting [4] today and tomorrow. Before you click away to a story with more sexappeal, answer two questions:

How many people were killed in the wars that convulsed Europe between 1914 and 1945?

Between 1871 and 1945 France and Germany went to war three times, how many times havethey gone to war since?

You are thinking about the answer to the first, but know the answer to the second: None.Zero. Zip. The story of the euro and its current crisis begins with that fact.

The idea of what is today the European Union can be traced to those 70 years of war anduneasy peace between Germany and France. Out of the rubble of that era two visionarypoliticians, Frenchman Jean Monnet and German Konrad Adenauer in 1950, just fiveyears after Germany's occupation of France was ended established the European Coaland Steel Community (ECSC) to make it easier for France to import German steel and coal.

The ECSC was a success and by the end of the 1950s the Common Market was created.

Decade by decade, treaty by treaty, Europe's political leadership continued their countries'drive toward economic integration. By 1985, the Schengen agreement eliminated manyborder controls, allowing the free movement of goods around the EU. Europe's collectiveeconomies grew.

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The logic of economic integration led inevitably to the creation of a single currency. TheMaastricht Treaty, signed in 1992, set the EU on the path toward the euro, launched in 1999and used today by 16 of the EU's 27 members.

The logic for having a single currency may have been impeccable, but implementing it meantputting the idea through that most illogical of processes politics. Politics is aboutappealing to emotion and the call of national identity is about as emotional as it gets.

In order to avoid running into the raw emotion connected to the EU's economic integration,much of the process was delegated to the European Commission, the EU's administrativearm in Brussels. Staffed by technocrats who speak and write a language unknown toordinary folk, the process by which the euro was created was opaque and to some minds notentirely democratic.

For some nations, such as Britain, giving up the national currency was an identity crisis toofar. Led by the right wing of the Conservative Party, opposition to joining the euro is visceraland deep seated in the U.K., and no British prime minister, Conservative or Labour, has evenattempted to argue for membership in the single currency.

France and Germany were willing to cede their national currencies, but not their authority.Politicians like to control tax rates. They like to set budgets. So these functions werereserved for each government's politicians to oversee.

For its first decade the euro worked well. It quickly established itself as a reserve currency. Itwas instrumental in helping the entire European Union grow economically. Today the EUaccounts for between 27 percent and 28 percent of world GDP a larger share than eitherthe U.S. or China.

But now there is a crisis. The onset of the global economic downturn caught over-leveragedeconomies in Europe with their pants down, especially those that, like America's economy,were heavily dependent on a never-ending property boom to maintain prosperity: Ireland [5],Greece [6], Portugal and Spain [6]. Riots erupted again in Greece on Wednesday, thousandsof young Irish people are re-enacting the great emigration of earlier generations, andMoody's investment service warned it is reviewing Spain's economy with an eye todowngrading its bond rating.

Current economic conditions have exposed the crack in the EU's foundation. A singlecurrency always implied greater political union and that has never happened. There is nofederal European government, and so there is no way for the EU to set a central tax policy orbudget. Each nation inside the euro is sovereign with its own political dynamics. It is an irony

that a politically created project has no overall political framework.

Now the smaller nations on Europe's periphery are in deep trouble, and they are having toraise money to pay off debts. The summit today and Friday is supposed to come up with acoordinated solution, but that won't be easy.

Germany carries a bigger stick when it comes to solving this crisis, not just because itseconomy is booming, but for historic reasons, according to Ian Stannard, currency analystfor BNP Paribas bank.

"The strength of the euro is inherited from the deutschmark," Stannard said. "The

Bundesbank gave credibility to the European Central Bank."

One solution suggested for helping raise money to bail out the weaker economies is for thecentral bank to sell Europe-wide bonds. But the sale of euro-bonds is a no-no for theGerman government. German Finance Minister Wolfgang Schauble told German television


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earlier this week, As long as we dont have a common budgetary policy and that was adecision made when setting up the euro then we need to have different interest ratespayable on government bonds, Schaeuble said. Because thats the only way to bringmember states round to sound policy. That cant be abandoned.

In other words, Ireland, Portugal and Greece can raise money by selling their own bonds,and if the interest they have to pay on them is murderous, tough. Germany's economicstrength and probity is not going to underwrite Europe-wide bond issues.

This doesn't mean Europe's leaders won't come up with some way of addressing the crisis, ifnot solving it, said Stannard. "The EU has always been managed by a series of deals beingbrokered."

The solution being discussed at this week's summit involves rewriting a clause of the recentlyratified Lisbon Treaty: The member states whose currency is the euro may establish astability mechanism to safeguard the stability of the euro area as a whole. The granting offinancial assistance under the mechanism will be made subject to strict conditionality.

That is pure European technocrat language. I think what it means is that bailouts will be

decided on a case-by-case basis. Whether that keeps the bond markets at bay is open toquestion.

Over in Britain, there is a self-satisfied sense of "I told you so." Yesterday at Prime Minister'sQuestion Time, David Cameron was asked by Mark Reckless, a member of his ownConservative Party, "The BBC reports that the German Finance Minister wants to set aninterest rate to punish Ireland. Will the prime minister confirm that this country wants to helpIreland?"

The prime minister replied: "My right honorable friend the Chancellor of the Exchequer willbe setting out the details of the loan on Second Reading of the Bill today, but I think that it isworth standing back and asking ourselves, 'Why is it that we are able to make a loan toIreland? Why is it that people are asking us to do that?' It is because Britains economy is outof the danger zone and recovering." The reason for that, he implied was because Britain wasin charge of its own economic policy.

Despite the more alarmist analyses that have been published, Stannard does not think theeuro is in danger of collapsing. "The euro is going to continue. The political will is very strongto keep it going," he said. "There are still countries queuing up to join the euro."

And if you wonder why the political will is still there to maintain the single currency now is thetime to answer the questions at the top. No one knows precisely but a good estimate is thatabout 70 million people died in World Wars I and II. No one has died in a European warsince the euro went into circulation.

Business & Tech [7] Europe [1] Germany [8] Ireland [9] Spain [10] United Kingdom [11]Business & Tech Europe Germany Ireland Spain United Kingdom

Copyright 2011 GlobalPost International News

Source URL (retrieved on 2011-09-13 00:19): http://www.globalpost.com/dispatch/european-union/101215

/eurozone-euro-crisis

Links:

[1] http://www.globalpost.com/news/regions/europe[2] http://www.globalpost.com/bio/michael-goldfarb

[3] http://www.nytimes.com/2010/12/17/business/global/17summit.html?ref=business

[4] http://www.bbc.co.uk/news/world-europe-12014385?utm_source=twitterfeed&utm_medium=twitter

[5] http://www.globalpost.com/dispatch/ireland/101207/irish-economy-bailout-budget-cuts


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[6] http://www.globalpost.com/dispatch/spain/101204/spain-portugal-economy

[7] http://www.globalpost.com/news/business-tech

[8] http://www.globalpost.com/news/regions/europe/germany

[9] http://www.globalpost.com/news/regions/europe/ireland

[10] http://www.globalpost.com/news/regions/europe/spain

[11] http://www.globalpost.com/news/regions/europe/united-kingdom


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the euro crisis, explained

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