Existential Crisis for the Euro: The Last Opportunity for a Strong Currency

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This discrepancy between economic conversion and political conversion is at the heart of the euro's problems today. Indeed, the economic reasoning for the currency union was far less convincing than the political. It was already clear to economists in the 1990s that the euro zone would not be an "optimal currency area." There would be "assymetrical shocks" -- meaning events that would have different effects on different member states, just as we are seeing now, that would be difficult to bring under control. The currency area lacked:

• Monetary shock absorbers -- national exchange and interest rate policies, which could be adjusted as needed, were eliminated with the transition to the euro.

• Real economic shock absorbers -- the Europeans are neither mobile enough nor their national labor markets flexible enough for the market to balance out differing national developments on its own.

• Fiscal shock absorbers -- a redistribution system among member states that could help to balance out divergent economic developments and asymmetrical shocks. No currency zone can manage without such transfers.

Right now, early forms of such redistribution mechanisms are taking shape in meetings that would have been inconceivable one year ago -- and they shouldn't really surprise anyone. And yet the people, especially the Germans, are surprised. Even shocked if you trust the public opinion polls.

Why? Because nobody prepared the massive size of the bailout programs that have been announced. The euro was supposed to be "as strong as the mark." But even Germany has comprehensive instruments for redistribution between the federal government and the states -- and the states have their own, as well. But no one talks about it.

The Euro Is a Paradox

The process of building a cohesive European Union needed to anchor the euro never took place. No one attempted to push through a common second language, and as a consequence there is no common media, no unified method of communication and no true democracy at the EU level. Instead, member states, including Germany, in recent years have been pursuing their national interests more proactively. Furthermore, the euro zone now encompasses 16 countries and 350 million people -- far more than the cozy union of six envisioned under Werner's plan -- an unmistakably large entity. And people are expected to express solidarity within it?

The euro is a paradox: a political project that has long lacked political support. Is it really a surprise to anyone that the feeling of togetherness and solidarity amongst Europeans has remained weak? Without a binding emotional basis, it is hardly conceivable that the euro will hold together in the long run.

In order for history to take a positive turn, Europeans need to reach at a new consensus. It could look like this:

• The member states must learn to understand themselves as a community that shares a common fate and together they must strengthen democratic control over shared finances;

• They need to understand solidarity as a two-way street -- no one will be left in the lurch, but countries also may not live irresponsibly at the expense of others;

• They must, despite all their debts, enter into the long and difficult path of austerity -- and eschew what would might appear to be the easy way out: inflation. (If they do go down that path, economically stronger countries would at some point threaten to leave the euro).

What is needed is a political tour de force that requires no less than countries giving up a large chunk of their ego and transferring greater powers to the European level. Will they be ready to do that? Or will we fail?

Only future historians will know. At present, anything is possible.

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• Part 1: The Last Opportunity for a Strong Currency
• Part 2: Three Rules for a New Europe