Built on a Lie: The Fundamental Flaw of Europe's Common Currency

The euro is under attack like never before, as the promises on which it was based turn out to be lies. Hedge funds are speculating against Greek debt, while euro-zone politicians work behind the scenes to cobble together rescue packages. But fundamental flaws in the monetary union need to be fixed if Europe's common currency is to survive. By SPIEGEL staff.

Photo Gallery: Euro Under Attack by Speculators Photos
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German Chancellor Angela Merkel was full of praise and recognition for Greek Prime Minister Georgios Papandreou. His government, Merkel said on Friday evening after the two leaders had met to discuss the Greek financial crisis, had performed "a massive feat of strength." The Greeks, Merkel continued, had implemented a package of measures, which impressed the capital markets, "in a remarkably short space of time."

Merkel said that she was pleased to see how successful the placement of the Greeks' new government bond issue had been. "It worked out well," she said.

Papandreou also seemed pleased as he listened to the German leader, thanking her profusely for her support and making it clear that he had not asked for financial assistance.

Both politicians seemed to have emerged as winners. Last Wednesday, Papandreou unveiled a series of austerity measures that imposed billions in cuts on Greek retirees, drivers and civil servants. The next day, Greek government negotiators easily managed to secure €5 billion ($6.8 billion) in new loans in the international capital market. Merkel called it a "very, very important signal." "This is the only way Greece can secure its future," Papandreou said. Two winners appeared to be celebrating their triumph, and the message they sought to convey to the public was that the Greek crisis is over.

Breathing Room

If only that were the case. The truth is that the two leaders have won, at best, a battle, but not the entire war. Europe has given itself a few weeks' breathing room. But the doubts over whether Greece and the common currency can be defended in the long run, and whether the country will truly make it on its own, as Alternate Greek Foreign Minister Dimitris Droutsas insisted in a SPIEGEL interview, have hardly been diminished.

The risks are considerable. Greece's trade unions and other special interest groups have announced new strikes and large-scale protests. The economic forecasts for the highly indebted country are deteriorating from week to week. And speculators on the international financial markets are firmly convinced that Athens will be in financial difficulties again, perhaps as soon as April, when the country is scheduled to repay loans worth €12 billion, or in May, when another €8 billion will come due.

"We seriously doubt that Greek politicians have the necessary political capital to push through their reforms," New York hedge fund manager Jonathan Clark wrote to his investors. And Hans-GŁnter Redeker, the chief foreign currency strategist at major French bank BNP Paribas, predicts that the country and its neighbors will experience "a deflationary shock."

At issue are the stability of the euro, Europe's political unity and the eternal question of who will prevail in the struggle over the future of a currency. One side consists of the international financial industry, which is betting billions on a Greek bankruptcy or the demise of the euro. The other side comprises European governments, which are determined to defend their common currency, introduced 11 years ago, at all costs.

Battle between Good and Evil

The war of nerves reached an initial climax last week. It was a struggle characterized by bluffs and threats, gambling and trickery, complete with dramatic scenes reminiscent of Hollywood films in which two drivers race toward a cliff: Whoever slams on the brakes first is the loser.

And, again in typical Hollywood fashion, European governments tried to frame the conflict as a final battle between good and evil: between politicians acting for Europe's common good and greedy financial sharks interested purely in their profits and capital gains.

But it isn't quite that easy. Many of the most notorious gamblers don't work on the trading floors of international financial centers, but in government offices in Athens, Madrid, Berlin and Brussels. They have either used the euro, along with tricks and falsification, to live for years at the expense of others, or they have deliberately looked the other way.

The notion that the European common currency is based on nothing but a series of lies is now taking its toll. All of the founders of the euro knew that the new currency could only be stable if all member states committed themselves to sound financial policy and, in the long run, spent only as much as they collected in tax revenue. But many ignored this principle right from the start.

Violating the Rules

The euro had hardly been introduced before the monetary union turned into more of a debt union. Violating the union's self-imposed rules of solid budget practice soon became routine, and not only in Greece. Sometimes it was done openly, and sometimes not. Sometimes it triggered conflict among the member states, while at other times there was mutual agreement over the practice. In general, the offenders seemed to believe that things would work out in the end, and that others would foot the bill.

The first lie was soon followed by the second. The euro-zone members had promised to support the common currency with a common policy. The problem was that they were not prepared to make good on their promise. Instead, each of the 16 euro-zone countries behaved, and continues to behave, as if it were still managing its own currency. Each country went its own way when it came to lowering or raising taxes, or borrowing money or cutting costs, almost as if it were expected not to take the other euro countries into account.

But in a monetary union, almost every economic decision has consequences for the partner countries. When wage costs fall in Germany, business owners and workers are affected in even the most remote corners of Ireland or Portugal.

In the past, exchange rates cushioned the consequences of diverging developments. When a country gained in economic strength, the value of its currency rose. If it loosened the reins, its currency was devalued.

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