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

Since its inception, the euro zone has been built on lies, the most grievous of which is the idea that the common currency could work without political union. But Europe's politicians are currently suffering under a different but equally fatal delusion -- that they have all the time in the world to fix the crisis.

A Commentary by Armin Mahler

A ceremony to mark the launch of the euro coins in Frankfurt in December 2001: The euro was always built on delusions.

A ceremony to mark the launch of the euro coins in Frankfurt in December 2001: The euro was always built on delusions.

How much does time cost? That depends what you need it for. The time that Europe's leaders want to buy to tackle the euro crisis is a precious commodity. And its price keeps going up and up.

Initially, it was supposed to cost €110 billion ($130 billion). That's how expensive the first EU bailout package for Greece was. Soon, it was expanded via a comprehensive rescue fund that helped out Portugal and Ireland. Then came a second bailout package for Greece, followed by an even more comprehensive rescue fund for the rest.

In late September 2011, representatives in Germany's parliament, the Bundestag, had not yet voted on this expanded package -- which would put Germany alone on the hook for €211 billion -- but it was already clear to them that even that wouldn't be enough. But nobody could say that out loud, and especially not Finance Minister Wolfgang Schäuble, because they obviously didn't want to endanger the government's majority in parliament -- and, thereby, its own ability to govern.

On top of that, the European Central Bank (ECB) is buying up sovereign bonds of debt-ridden euro-zone countries. At first, it was Greece, Portugal and Ireland. Then, beginning in the summer of 2011, it bought bonds from Italy and Spain. It now has a grand total of over €195 billion of bonds on its books. If things should go south, Germany will also ultimately be responsible for 27 percent of that figure, corresponding to Germany's share of the ECB's capital.

Winning Time

The argument is always that it's all about winning time. Time that would allow the financial markets to settle down. Time that would let the debt-ridden PIIGS states (Portugal, Ireland, Italy, Greece and Spain) implement stringent cost-cutting measures. Time that would make it possible for the euro zone to reform its institutions and rules -- and perhaps even let Greece default without having the entire euro immediately implode.

But is all that money really well invested? And will the time it has bought also be put to sensible use?

Anyone who believes that the European currency union doesn't have a future anyway will think that every euro devoted to the rescue effort is a euro too many. On the other hand, anyone who thinks that the European Union is no longer imaginable without the euro -- as Chancellor Merkel does -- will believe that no price is too high.

But whoever wants to save the euro must first be clear about the ultimate goal he or she wants to achieve. Do they want a currency union like the one constructed in the 1990s, with states that are solely responsible for their own finances, or a so-called transfer union with shared liabilities? Do they want a currency union in its current configuration or a smaller but stable euro zone of the core countries? And, whatever the answer, they also have to ask themselves which of these possibilities can realistically be implemented politically.

The Mistakes of the Past

In answering these questions, the very first thing one has to do is conduct an honest analysis of what went wrong with the ambitious project of giving the old continent a unified currency, and why it is stuck in such a deep crisis today. Indeed, if one is going to be able to draw the correct conclusions for the future, one can only do so by first identifying the mistakes and errors of the past.

But, already at this point, one runs into problems. Almost all of the major political figures in Europe -- whether it's Helmut Schmidt, Germany's chancellor from 1974 to 1982, who sees himself as the grandfather of the common currency, current Chancellor Merkel, Jean-Claude Juncker, the head of the Euro Group, or Jean-Claude Trichet, the president of the ECB until Oct. 31 -- have been unanimous in stressing that there isn't any euro crisis at all. Rather, in their eyes, what we have is simply a debt crisis in some euro-zone countries.

If it were only that simple. Unfortunately, it isn't. Simply put, without a common currency, Greece's problems wouldn't have spilled over into Spain and Italy. And, without this risk of contagion, politicians and central bankers wouldn't be staggering from one crisis summit to the next, ever driven by the fear that the currency union might break apart.

Without the euro, Greece could recover more easily. It could devalue its currency and thereby make its national economy competitive once again.

Indeed, without the euro, Greece wouldn't have ever gotten into this calamitous situation in the first place. The fact that it was a member of the currency union was the only thing that allowed the country to borrow money at such favorable rates and get itself up to the neck in debt.

The Principle of Hope

Nevertheless, not one of the currency union's founding fathers will admit that it was poorly designed. The currency union brought together countries that weren't compatible economically simply because it was opportune politically. It replaced the currency exchange rate, the standard mechanism for balancing out differences between national economies, with the principle of hope. Now, the common currency was supposed to make the economies align themselves with each other, practically automatically.

In reality, however, the differences between the economies of the euro-zone countries became larger rather than smaller. The so-called "Club Med" countries benefited from the low common interest rate. They lived beyond their means and they consumed more than they could afford -- to the detriment of their already weak ability to compete.

A country with a flagging economy normally devalues its currency. Doing so makes its goods cheaper on the global market, allowing it to increase exports and cut back on its deficit. But, in a currency union, there isn't an exchange rate that can serve as a compensatory mechanism. If a country doesn't have a sound economy, the tensions only increase.

For these reasons, it has always been clear that the currency union cannot function without shared economic and financial policies. Indeed, that's exactly how politicians imagined things in the beginning. For example, in November 1991, then-German Chancellor Helmut Kohl told the Bundestag that a currency union without a political union would be absurd.

Political Delusions

At the time, Europe's governments couldn't agree on steps toward greater political integration -- but they still kept pursuing the currency-union project anyway. The vague expectation was that the political union would follow the economic one of its own accord.

This hope was never fulfilled, and so the euro rushed headlong into crisis. Things started off slowly. But, once the criteria of the Stability and Growth Pact were no longer adhered to, they started picking up speed -- until even the key promise that pro-euro politicians had made was broken. According to the so-called "no-bailout clause" of the Maastricht Treaty, no country was supposed to be liable for the debts of another.

As the former SPD Finance Minister Peer Steinbrück told SPIEGEL in an interview published in September, that was an "error that became evident during the crisis." As he sees it, this "political delusion should have already been acknowledged and explained a year and a half ago."

Instead, Germans were repeatedly told that saving the euro might not even cost them anything, that no money had changed hands yet, that only guarantees had been given. But nobody can believe that anymore.

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riskmanager 12/30/2011
1. Deja vu
Reading todays article about delusions and lies I was taken back to UK papers in the early 1990's. How odd. And how does this Damascene conversion sit with recent Der Speigel articles about the UK, the country that tried to tell you this Euro would cause massive harm to European people and refused to go along with what even Der Spiegel now describes as lies and pay our money to ineffectively bail out your deliberate mistakes. Who were the good Europeans? Who had the best interests of Europe at heart? Would the UK have helped by going along with the latest deception, just allowing things to get even worse before reality is finally faced? And its simply no good blaming the economic weather (Lehmans crisis etc) for the fact that you built a house of straw that has been falling down for a decade and would continue doing so. There are 30% plus differences in competitiveness and a balance of payments crisis as a direct result of the Euro's design, and nothing else. The rest of the world would be recovering now but for the solution-less Euro disaster. Europe, will it ever understand cricket? Well you better start facing reality, and this article is a good start. And don't forget, if the USA or UK had done something really stupid that harmed your economy you would hate them for it and behave badly. It is what you did in 2008, only 3 years ago. Who will come to EUropes aid? No one. You have to do it. Get on with it! Pay up.
donlast 12/31/2011
So, the notion of having a single currency without first having a single political union has failed, as it was bound to fail. Never in history has such a construct been tried and why? Because it does not make sense. But the authors of the Eurozone were neither fools nor were they deluded. They knew exactly what they were doing: that a single currency would lead to precisely what we now - a monetary construct in crisis - which would then provide the impetus for true political union under the dire threat of economic and financial mayhem. Now where is there any endeavour to lay out in plain language, so that voters can understand what they may expect , any, but any, explanation of what it means to give up national sovereignty. To renounce the country's identity and subsume its executive, legislatures and judiciary under one. single common set of institutions. Where is the informed adult debate? Where the analysis? Are all political pundits smoking weed? Gone on vacation? Is the general media sleep-walking towards political disaster? And we Europeans are suppose to be so sophisticated, so wise. Well, there is a road map if you are looking for one, it is American, or one should say old American. It is the Federalist. The writings and speeches of those men who formulated the American Constitution. If Europe thinks it can do it, go to it, but in my book I find the whole idea that the individual countries of Europe will unite to form a United States of Europe irrational and absurd. It is inconceivable. The pre-conditions simply do not exist.
harmk 12/31/2011
In the early stages of the European Union I got into trouble with friends for raising questions and reservations about the workings and possibilities for the project. It seemed to me that it was a rather frantic gathering of nations into one United European entity similar to the USA and the common currency "Euro" was a draw card because of its convenience for tourism. The idea of No Borders, one happy family of nations was irresistible. At the time I argued for a common currency to be adopted which would be valid in any of the countries participating BUT the individual country currency would co-exist. This I argued would create benefits for trade between the countries and bolster their individual market value for international trade. It would give opportunity to help each other out because each country could adjust their currency relative to the euro. The political union could have grown into a whole, rather than being imposed and administered by a european parliament which as it turns out, many countries can not readily accept because they feel their autonomy threatened. In good time the Community might have developed into a cooperating body. I now expect that the current position will prevail and likely worsen, in part also because individual countries cannot work out their credit problems in their own way. For instance they likely cannot bypass the bail-out to the banks by making direct loans available to small businesses which then pass the money to the bank after they have made use of it, which is now not possible because the banks use this bail-out money to settle their problems first.
BillCA 12/31/2011
4. Only themselves?
This is a good thumbnail sketch of what went wrong and why. I would simply add that the European politicians lie(d) not only to themselves, but also to everyone else. If the EU is to win any kind of democratic legitimacy (a prerequisite for its continued survival), the political con-men who sold this Brooklyn Bridge of a common currency must be replaced ASAP by representatives who tell their electorates the truth. The bond markets already understand the truth, so I don't think that acknowledging it will cause much more damage than the lies that have been propagated so far. I exclude Ms. Merkel from this criticism. She is doing her best to clean up the mess created by Kohl. Cheers, Bill
pmoseley 12/31/2011
5. Prosecute the Eurozone leaders
At last we have the German press inferring that the Brits must have been right about the Euro, both at its inception and when the UK recently refused treaty change, even if they don’t have the sense or courage to even mention that fact in this article. The UK has been heavily criticized by virtually all Eurozone members for not joining the Euro club of lemmings who seem oblivious to the need for both fiscal and political union before the Euro has any hope in hell of surviving. And the chance of political union amongst 27 nations is zero. At least Britain will never join a political union with the rest of Europe and I am writing this as a committed European! Result? The EU will break up if they continue with this nonsensical financial support for the Euro. And when it happens, all the EU lemmings will blame the UK and the international finance sector. And as far as the lies mentioned in this article are concerned, the Eurozone leaders involved in setting up and running this Euro façade should be prosecuted by the European Court for economic sabotage and distress in the name of egoism and pandering to domestic politics. Without such accountability there will be no justice.
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