An EU Protectorate: How Brussels Is Trying to Prevent a Collapse of the Euro

By Armin Mahler, Christian Reiermann, Wolfgang Reuter and

The problems facing Greece are just the beginning. The countries belonging to Europe's common currency zone are drifting further and further apart, and national bankruptcies are a distinct possibility. Brussels is faced with a number of choices, none of them good.

Men like Wilhelm Nölling, former member of the German Central Bank Council, and Wilhelm Hankel, an economics professor critical of the euro, have been out of the spotlight for years. In the 1990s, they fought against the introduction of the common currency, even calling on Germany's high court to prevent the creation of the euro zone. But none of it worked.

Now both men are in demand again, and the old euro critics' beliefs are more relevant than ever. Were the skeptics right back then, when they said Europe wasn't ready for the euro zone? Were the differences too great and the politicians too weak to ensure a strict and stable course?

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Photo Gallery: The Troubles Facing Greece
"The euro should really be called the Icarus," Hankel suggested back then. He predicted the currency would meet the same end as the hero of Greek legend, who paid for his dream of flight with his life.

Is the euro's high flight over now too? The news these days is alarming. It's causing a commotion on financial markets and intense discussion in capitals across Europe, as well as in Frankfurt, seat of the European Central Bank (ECB).

Brussels took a hard line with Athens last week. Greece must cut costs drastically under close European Union supervision, a sacrifice of a share of its sovereignty. Risk premiums for Greek government bonds have risen drastically, and the country has to pay higher and higher charges.

The Possibility of State Bankruptcies

Accruing debt is becoming increasingly expensive for other countries in the euro zone as well, among them Portugal and Spain. The southern members of the euro zone are especially being eyed with mistrust. Speculators are betting that bonds will continue to fall and that, eventually, the countries won't be able to borrow any more money at all. State bankruptcies are seen as a possibility.

"We've reached a point where it's possible to deal individual countries a lethal blow by downgrading their credit and boycotting their government bonds," Nölling warns.

Many are now wondering how the stronger euro-zone countries should react -- whether it's possible to help the weaker ones without jeopardizing themselves and the common currency. Furthermore, there is a risk that euro-zone members will continue to grow apart economically, a trend that could cause the monetary union to eventually collapse.

Doing nothing is not an option. In light of the national debt in Greece, Portugal, Spain and Ireland, the euro zone is in danger of transforming from a "common destiny to a common liability," Nölling says.

And so it won't be any ordinary meeting when finance ministers from the 16-euro zone countries meet for a regularly scheduled get-together in Brussels next Monday. The European Commission plans to assign each country homework to be completed in the coming years.

Cohesion and Stability

The Commission doesn't hold Greece solely responsible for the current euro woes. Experts close to Economic and Monetary Affairs Commissioner Joaquín Almunia say nearly every participating country is compromising the cohesion and stability of the common currency.

"The combination of decreasing competitiveness and excessive accumulation of national debt is alarming," the experts wrote in a recent report, adding that if the member countries don't get their problems under control, it will "jeopardize the cohesion of the monetary union."

Differing economic development within the euro zone and a lack of political coordination are to blame, they say. In the more than 10 years since the euro was introduced, the Commission states, it has become clear that simply controlling the development of member states' budgets is not enough. What that means, more concretely, is that the stability provisions stipulated in the Maastricht Treaty to regulate the common currency aren't working, and member states need to better coordinate their financial and economic policy measures.

That is precisely what euro skeptics have said from the beginning -- that a common currency can't work in the long run without a common economic and financial policy. The member countries' governments ignored these objections, unready to give up a further aspect of their national sovereignty.

Now politicians are facing a difficult decision: Should they continue as they have, thus potentially undermining the euro's ability to function? Or should they yield a portion of their national sovereignty to Brussels?

Without common policies, the individual countries drift further and further apart. Before the euro was introduced, exchange rate adjustments served to dispel tensions. Now the common currency zone lacks the option of adapting by revaluing currencies.

Watching with Alarm

EU officials are watching with alarm as the various euro-zone countries' competitiveness diverges sharply. The differences are especially large between countries like Germany, the Netherlands and Finland, which are characterized by current account surpluses, and countries with high budget deficits. Along with Greece, this second category includes especially Spain, Portugal and Ireland.

These countries' competitiveness has dropped steadily since the euro was introduced. They lived on credit for years, seduced by the unusually low interest rates within the euro zone, and imported far more than they exported.

When demand collapsed in the wake of the global financial crisis, governments jumped in to fill the gap, with serious consequences -- debt skyrocketed. Spain's budget deficit was at 11 percent last year, while Greece's was nearly 13 percent. Such high debt is simply not sustainable in the long term.

In the past, the solution for these countries would have been to devalue their currency, which in turn would make imports more expensive and exports cheaper. Such a move would stimulate their national economies and strengthen their competitiveness.

Now, however, these countries must submit to a drastic therapy regime at the hands of the European Commission. They need to balance their budgets, while simultaneously creating more competition on the labor and goods markets.

The directives from Brussels translate into difficult sacrifices for the citizens of the affected countries. Employees will have to scale back wage demands for years, and civil servants will see their salaries cut. Ireland has already embarked on this path; Greece and Spain will follow.

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1. Ironic similarity between China-US and EU rich-poor
tsangpakho 02/09/2010
If one substitute China for Germany and US for Greece, Spain, Portugal and Ireland in this article, one can see the similar underlying problem (fixed currency exchange rate, living beyond one's means, artificially low exchange rate ... etc)and the common pattern of defensive behaviour, including finger pointing.
2. No bailout needed
andrewpurdy 02/10/2010
There is no reason for the EU to bail out Greece. Just let them default. Some investors and speculators will lose some money. So what. The Euro won't collapse any more than the dollar will collapse when California defaults. However, the EU will probably have to readjust its internal governance. They will have to change the constitution to fully federalize the EU, and give the central government the needed fiscal and taxation powers that it currently lacks. The EU will have to become more like the US.
3. Political union
akaghzi 02/10/2010
Economic union with out political union is not a practical solution, the current status of EU parliament must wield more political and policy making power than it currently has, more in line with confederation probably following Canadian model. All crisis present opportunities and more severe crisis bring to table a greater opportunity, I am not a proponent of shock therapy like Friedman, the current fiscal crisis in Greece and potentially in Spain, Portugal and Ireland is in my opinion is one of them. Instead of ECB bureaucracy I believe EU Parliament can and should address the issue and bring about a fundamental change, in terms of overall fiscal policy, transparency in statistics gathering and reporting, regulatory reforms of various markets specially financial markets. I have been reading about Greek fiscal issue for few weeks now, the speculators have literally put tens of billions of dollars in bets against Euro against its counterparts citing weakness in above mentioned countries' governments' balance sheets, making even harder and costlier for these governments to act in balanced fashion. I believe people of EU need to address this issue more seriously than rallying against state bailout of private financial institutions, because this centrifugal development of member states will eventually break the economic union, and a believer in butterfly effect I think that time of acting of making EU parliament more effective politically is now.
4. Not similar at all...
Teaser38 02/10/2010
Zitat von tsangpakhoIf one substitute China for Germany and US for Greece, Spain, Portugal and Ireland in this article, one can see the similar underlying problem (fixed currency exchange rate, living beyond one's means, artificially low exchange rate ... etc)and the common pattern of defensive behaviour, including finger pointing.
This is nothing like the US-China relationship. First, China can simply divest itself of US dollars and stop buying US treasuries. Or the US could just print money and inflate itself out of its debt (or default). Germany is stuck with Greece in a currency union. It isn't that Germany is a major of creditor of Greece, but it is that Greece cannot print money. Greece cannot default like Argentina did in '02 and not cause a panic in the rest of the EU and cause the other PIIGS to default as well.
5.
symewinston 02/10/2010
Zitat von Teaser38This is nothing like the US-China relationship. First, China can simply divest itself of US dollars and stop buying US treasuries. Or the US could just print money and inflate itself out of its debt (or default). Germany is stuck with Greece in a currency union. It isn't that Germany is a major of creditor of Greece, but it is that Greece cannot print money. Greece cannot default like Argentina did in '02 and not cause a panic in the rest of the EU and cause the other PIIGS to default as well.
China is not stupid, to bankrupt its main trading partner would mean bankrupting itself.
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Graphic: The euro-dollar exchange rate Zoom
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Graphic: The euro-dollar exchange rate

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Graphic: Budget deficits in the euro zone



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