Delusions of the Euro Zone: The Lies that Europe's Politicians Tell Themselves

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Just as the euro's introduction was based on a mistake, the effort to rescue the euro began with another instance of "political delusion," to use Steinbrück's phrase.

With debts amounting to 150 percent of GNP, Greece is de facto bankrupt. Over the course of 2011, even the leading representatives of the euro zone finally accepted this fact -- after having claimed its opposite a year previously.

This explains why the first bailout package for Greece was, to put it mildly, based on an illusion. Possibly against their better judgment, countries putting money into the package assumed that Greece would be able to solve its debt problems by implementing a stringent belt-tightening regime.

The so-called troika, made up of representatives of the International Monetary Fund (IMF), the ECB and the European Commission, was tasked with evaluating the success of these measures.

But they were not successful. Instead of getting better, things only got worse for the country. The austerity measures caused the economy to stall, hoped-for increases in state revenues never materialized, and the country started sinking deeper into debt rather than climbing out of it. But the financial assistance kept coming nevertheless.

Learning a Bitter Lesson

This year, the would-be euro saviors have had to learn a bitter lesson: If they assume that the collapse of a single euro-zone country would bring with it incalculable risks, comparable to the 2008 collapse of the American investment bank Lehman Brothers, then they have no credible power to exert pressure on deficit offenders. Instead, they just have to keep paying. And then the euro zone will have to subsidize countries like Greece for the long term -- just like the rest of Germany has been supporting the chronically cash-strapped northern city-state of Bremen for decades under the country's federal financial equalization system.

The only question is whether ordinary people will play along -- both in the donor countries, who are meant to keep paying, as well as those in the recipient countries, who will have to suffer mightily under stringent austerity measures.

In September, the Bundestag voted to approve the expansion of the euro bailout fund, the European Financial Stability Facility (EFSF). But there is growing resistance to additional maneuvers of this sort -- and not only in Germany.

The currency union has already started subtly transforming itself into a debt union. If the ECB -- and soon the EFSF too -- purchase sovereign bonds that might never be paid back, or at least not in full, the stronger countries will be liable for the weaker ones.

Of course, politicians don't like to use phrases like liability union or transfer union. But what these phrases describe became reality long ago -- which also numbers among the truths they prefer not to mention.

Bottomless Pit

Yet another inconvenient truth is that not all countries will be able to reduce their debt levels by themselves and boost their competitiveness. The currency union can only survive as a transfer union, and if it doesn't want to become a bottomless pit, it also needs to become a fiscal union -- one with strict rules and independent institutions capable of enforcing them.

For these reasons, the euro states have to cede a major part of their sovereignty to Brussels. Whether or not one wants to call the result the United States of Europe is a matter of taste.

Proponents of this kind of union fantasize that the crisis will give rise to an opportunity. They believe that now, in the hour of need, the pressure to act is big enough to push through the integration of Europe that has previously always failed because of national self-interest.

But they might be deceiving themselves once again. The parliaments of the EU member states would have to approve any far-reaching amendments to the union's treaties. What's more, in many cases, this would also involve changing national constitutions and holding referendums. Such a process is protracted, and its outcome is anyone's guess.

The alternative would be returning to how things were originally, meaning at the birth of the currency union. As happened then, euro-zone members would pledge to maintain stability (which admittedly already failed once before, because the rules were overridden when push came to shove). In this case, there would be no permanent transfers and also no collectivization of debts.

Inevitable Shrinkage

In the end, the currency union will shrink. Greece and possibly even other countries will have to abandon the euro in order to be able to get back on their feet with the help of their own, significantly devalued, currency.

The euro saviors and their citizens must finally face the uncomfortable truth. Under current conditions, the euro will fail economically because the differences between euro-zone countries are too great.

But new conditions that would give the euro a firm economic foundation are almost impossible to implement due to political factors. In any case, they can definitely not be put in place quickly enough to combat the current crisis.

Indeed, the would-be euro saviors are suffering from yet another delusion: that they are able to buy all the time they need, without any limits.

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• Part 1: The Lies that Europe's Politicians Tell Themselves
• Part 2: A Bailout Based on an Illusion