Europe's Neverending Crisis: Can the Euro Still Be Saved?

The countries of the euro zone are hopelessly divided over the question of how to save the currency in the long term. Bailouts for individual countries like Ireland and Greece can only be a temporary solution. Meanwhile, an internal paper drawn up by the German government has revealed Berlin's plans for forcing private-sector investors to take their share of losses in future crises. By SPIEGEL Staff

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In the time since European leaders named the Belgian politician Herman Van Rompuy president of the European Council a year ago, the public has taken little notice of the reserved native of Belgium's Flanders region. But that changed last Tuesday, when Van Rompuy made headlines across Europe with a brief remark.

"We all have to work together in order to survive with the euro zone, because if we don't survive with the euro zone we will not survive with the European Union," Van Rompuy said during a panel discussion. With his comments, he expressed what many people in Brussels had been thinking but few had dared to say out loud.

As it happens, Van Rompuy would also have preferred not to say what he said. Two days later, he claimed that he had been misunderstood. He had apparently stuck his neck out too far. But that doesn't change the fact that the statement itself was correct.

Euro-zone governments have spent months trying to end the crisis facing their common currency, but the danger has not been averted. On the contrary, the crisis meetings have returned and billions in emergency funds are needed once again. And there is still no end in sight to the crisis.

Merely Temporary Relief

European leaders have tried all kinds of measures in the bid to save the euro. They approved a bailout program for Greece and a massive rescue fund for the entire euro zone, they whipped legislation through their parliaments and they expanded the articles of the Lisbon Treaty to their legal limits (and beyond, many would argue). The European Central Bank (ECB) has even violated an ironclad taboo by buying up the bonds of ailing countries in an attempt to stabilize their prices.

But those steps only brought temporary relief, which only lasted until the next piece of bad news emerged. Yesterday it was Greece, and now it's the sorry state of Irish banks that poses a threat to the common currency. Each new report fuels the suspicion that the problems may be so pervasive that they can no longer be solved with conventional methods and by taking on more and more debt. Fears are growing that the crisis could lead to the default of individual countries or possibly even the collapse of the euro zone.

A deep divide between two almost irreconcilable camps runs through Europe. German Chancellor Angela Merkel heads one camp, consisting of the northern European countries. Merkel sees herself as the defender of a culture of stability of the sort that Germany has maintained since the days of the deutschmark. Her goal is to prevent the monetary union from becoming a kind of transfer union, with Germany as paymaster.

The second camp consists of the so-called PIIGS states, which have accumulated too much debt in the past and are now hoping for help: Portugal, Italy, Ireland, Greece and Spain. They want the thing that Merkel wants to prevent: a union in which the strong pay for the weak. Europe's institutions are now maneuvering between these two camps.

Causing a Stir

The first act of the current crisis began in the chic French beach resort of Deauville in mid-October. To the consternation of their allies, Merkel and French President Nicolas Sarkozy announced the end of their ambitious goal to enforce a stricter stability pact with automatic sanctions for nations that break the deficit rules. In return, Sarkozy supported the German idea to assign some of the liability for future financial crises to private-sector creditors like banks and to accept the possibility of bankruptcy for an insolvent country. The 27 heads of state and government approved the deal at the European summit in late October.

The plans, and the horror stories about Irish banks, caused a stir in the financial markets, pushing up risk premiums for the government bonds of all the ailing countries. "Merkel and Sarkozy apparently didn't think about the second act," comments Luxembourg Foreign Minister Jean Asselborn.

The yields on Irish government bonds rose as high as 8.6 percent at times -- 6.2 percentage points higher than the rate Germany pays to borrow money. This prompted Irish Prime Minister Brian Cowen to angrily note that Merkel's actions were "not helpful."

The German plan to automatically force bondholders to pay up when financial aid packages are approved "might seem attractive from a theoretical point of view," says ECB executive board member Lorenzo Bini Smaghi, but it would "in practice destabilize markets and have severe effects on economies in the euro area." It could ultimately achieve the opposite of what was intended, says the central banker, because "speculators would take advantage of the situation, while many small investors would suffer losses."

Responding to the accusation that it triggered the Ireland crisis, the government in Berlin said that the German proposal to involve private-sector investors has no effect on current market behavior because it focuses on the period after 2013. It insists that even government bonds purchased today would remain unaffected by any new rules. "In fact, this has nothing at all to do with the current debate over Ireland," says German Finance Minister Wolfgang Schäuble.

Misjudging Reactions

None of this has reassured the players in the financial markets. Once again, the German government was confronted with the realization that it cannot take action relating to the euro crisis without taking the reactions of investors into account. It misjudged this reaction once before, when it opposed financial aid for Greece for so long. In those weeks of uncertainty, the risk premiums for Greek government bonds continued to rise, while speculators began setting their sights on the bonds of the other PIIGS countries.

In the end, the euro-zone countries approved a comprehensive bailout package, leaving Chancellor Merkel in a losing position -- and looking like she was to blame. Her many adversaries in Europe argued that by taking such an uncooperative approach, Merkel made the crisis worse and drove up the costs of the bailout. The chancellor justified her actions by arguing that if it hadn't been for her tough stance, the Greeks would not have agreed to a strict austerity program and the involvement of the International Monetary Fund (IMF).

Merkel's reputation in Europe has been battered since then. Many see her as a betrayer of European ideals who stubbornly pursues German national interests. These critics feel vindicated by recent developments.

There is a rising tide of anger directed at the chancellor. Greek Prime Minister George Papandreou has criticized Merkel, saying that her reform plans could break the backbone of entire countries, while the Portuguese finance minister likens her plans to a foul in the game of soccer.

Wait-and-See Approach

All this criticism prompted the Germans to avoid taking a leading role in the current crisis talks in Brussels. They took a wait-and-see approach, even when they were put under pressure, especially by Portugal and Spain. Both countries are afraid of being sucked into the Irish crisis.

Unlike the Greeks, who implored their fellow Europeans to come to their aid, the Irish needed more persuasion. They didn't want the Europeans' money, because they fear it could weaken their sovereignty. And they argued they didn't need it either, because they won't need to borrow money on capital markets until the middle of next year.

This is true in theory. Ireland's problems are not its government finances but the balance sheets of its banks. However, the two things are closely related, because the country issued a comprehensive government guarantee for its banks after the financial crisis -- without suspecting how big the problem could turn out to be.

There has been a quiet exodus of billions from Ireland in recent weeks. Most international investors were no longer willing to lend Irish banks as much as a cent. The Irish banks repaid €55 billion ($75 billion) to their international creditors, mainly German, French and British banks, because the corresponding bonds had matured. But those creditors took the money and fled from the country. Only government-owned banks were still willing to lend money.

By the end of October, the Central Bank of Ireland had extended "extraordinary liquidity assistance" in the amount of €20 billion without the Irish banks providing the corresponding collateral. Also by the end of October, Irish banks had borrowed €130 billion from the ECB, which is more than the Greek banks borrowed. ECB experts have been hard at work at the Irish Department of Finance since September.

Even though the government has already taken a considerable portion of their risks off their hands, Irish banks are still dragging around property loans valued at €200 billion, which have not yet been adequately written down. Even the reserves of the better financial institutions have been used up, and the entire Irish banking system is on the verge of collapse.

In internal talks early last week, ECB President Jean-Claude Trichet made a far-reaching proposal. To solve the problem once and for all, he said, both Ireland and Portugal, which is also in financial trouble, ought to be provided with sufficient funds. These ideas went over well, especially with smaller member states.

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1. Why is Merkel wrong focusing on Germany?
lakechamplainer 11/22/2010
Perhaps I am a simpleton when it comes to the ways of the world, but I simply don't understand why Angela Merkel is wrong to "focus" on what's good for Germany. Isn't that her job? I wouldn't mind at all if the President of the United States focused on what's good for the United States. Do I simply not understand the concept of a "Sovereign Nation"?
2. Does the euro deserve to be saved ? That is the question
Norberto_Tyr 11/23/2010
All of US will die for the fatherland it it is absolutely necessary but the question is who will gladly die for the currency, none; at least the ones with common sense. Money, or currency, is abstract power, it is a convention, a legal contract, a mirage; and we can extrapolate this statement to the European Union as a whole. Western Europe have suffered numerous invasions, most of them violent, barbarians ante portas have kick’em open in many occasions but the invasion perpetrated peacefully after WW II challenges in terms of smoothness even the famous Track II Gillete razor, the razor of the future. People relinquished their stable respected and strong currencies to the European dubious ‘Patacon’ without qualms, relinquished political power to a bunch of bureaucrats sitting in Brussels whom none knows neither were they came from nor were they are going to, Spanish jobs gone away to Baltic immigrants while the ‘ni nis’ taste sangria all day around. This seems a truly mass suicide. Perhaps it is needed a non European like myself to ask: ‘what the hell are these guys (Europeans) doing ?’ In short, the Euro and the European Union share the same origin and aims as Esperanto, another millenary dirty trick designed to infiltrate and corrupt. Norberto
3.
BTraven 11/24/2010
---Quote (Originally by lakechamplainer)--- Perhaps I am a simpleton when it comes to the ways of the world, but I simply don't understand why Angela Merkel is wrong to "focus" on what's good for Germany. Isn't that her job? I wouldn't mind at all if the President of the United States focused on what's good for the United States. Do I simply not understand the concept of a "Sovereign Nation"? ---End Quote--- There is nothing wrong with a leader who has the interests of his/her citizen in mind but Mrs. Merkel’s policy is, in the long-term, harmful for Germany because she does not have an concept with which the country can reduce its dependence on exports. She seems to believe that Germany can be led the list of exporters for eternal years. That won’t be possible. There are two grounds why the country is so successful – it has good products as well as cheap labour cost per unit. Its engine building and car industry have an outstanding reputation the latter, however, faces a strong competition therefore there are some dark clouds on the sky especially because it focuses too much on premium cars. The problems is that the revenues of the export must be invested in the countries where the goods were sold. So the banks which handle the sales have to find suitable investment opportunities. The more a country imports the more difficult will it for the bank to invest the money. In the end large bubbles are built.
4.
Anntink 11/26/2010
---Quote (Originally by BTraven)--- There is nothing wrong with a leader who has the interests of his/her citizen in mind but Mrs. Merkel’s policy is, in the long-term, harmful for Germany because she does not have an concept with which the country can reduce its dependence on exports. She seems to believe that Germany can be led the list of exporters for eternal years. That won’t be possible. There are two grounds why the country is so successful – it has good products as well as cheap labour cost per unit. Its engine building and car industry have an outstanding reputation the latter, however, faces a strong competition therefore there are some dark clouds on the sky especially because it focuses too much on premium cars. The problems is that the revenues of the export must be invested in the countries where the goods were sold. So the banks which handle the sales have to find suitable investment opportunities. The more a country imports the more difficult will it for the bank to invest the money. In the end large bubbles are built. ---End Quote--- Your answer implies that the definition of "success" is a profitable financial investment. This is the same neoliberal philosophy that has been controlling governments worldwide for many years now and has been such a disaster for everyone except those in the banking industries. Perhaps a better measure of "success" would be the happiness and contentment of ALL citizens.. not just the financial elites.
5.
BTraven 12/01/2010
---Quote (Originally by Anntink)--- Your answer implies that the definition of "success" is a profitable financial investment. This is the same neoliberal philosophy that has been controlling governments worldwide for many years now and has been such a disaster for everyone except those in the banking industries. Perhaps a better measure of "success" would be the happiness and contentment of ALL citizens.. not just the financial elites. ---End Quote--- I am sorry for not putting „successful“ in quotation marks. I think it is obvious that I do not support that policy. Therefore I do not understand your criticism.
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