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

Reuters

Part 3: Going In for the Kill


It was a deliberate disruptive maneuver, which the government in Berlin speculates was launched by precisely those financial institutions in London and New York that have always been opposed to the European common currency. Now the euro's opponents apparently felt that the time had come to go in for the kill on the weakened currency.

The European governments retaliated with a two-pronged strategy. Behind the scenes, they put together a government bailout package for the event that Greece does indeed file for bankruptcy. Publicly, however, they made it clear that the government in Athens would have to help itself for the foreseeable future. Their goal was to make it less attractive for speculators to bet on a Greek bankruptcy and, at the same time, to chip away at the foundation of the European Monetary Union.

The campaign, which began last week, had been long in the making. Last Wednesday, Prime Minister Papandreou unveiled his catalog of harsh measures: an increase in the rate of value-added tax from 19 to 21 percent; additional taxes that would increase the prices of gasoline and diesel, liquor and cigarettes, yachts, precious stones and luxury cars; a freeze on pensions; and a cap on wages and salaries for civil servants.

In return, Papandreou received the "direct reaction" he had been promised. Before the Greek premier had even disclosed the details of the new austerity plan, it was "welcomed" in Brussels, praised in Berlin as a "very important signal," and lauded in Paris as "tough and concrete."

None of what happened in Athens came as a great surprise. The EU finance ministers had even agreed to the financial scope and precise figures of the government's austerity program in mid-February.

'Torture Instruments'

The pressure on Athens was followed by part two of the government's strategy: the threat against the financial markets. The head of the euro group, Luxembourg Prime Minister Jean-Claude Juncker, began the attack. If the financial markets did not stop speculating against the euro, despite the ambitious plan for Greece, he warned, they could expect to see "decisive and coordinated action." He added that he still had a few "torture instruments" up his sleeve.

European government representatives and central bankers soon made it clear what Juncker meant. Some ignited a debate over the possibility of enacting a law to put a stop to trading in highly speculative derivatives. Others let it be known that the private rating agencies could be getting some competition in the future, if the European Central Bank were given the power to assess the creditworthiness of countries itself, rather than relying on private rating agencies such as Standard & Poor's. The rating agency Moody's reacted quickly, expressing uncharacteristic praise for the Greek austerity program.

That was followed by a successfully placed Greek government bond issue and corresponding declarations of victory from Berlin, Paris and Brussels.

Now the protagonists are hopeful, but not truly sure of success. Will the Greeks actually implement its brutal cost-cutting program? Will the government survive this trial? And will the speculators back off?

Preparing for the Worst-Case Scenario

No one knows the answers to those questions -- which is why a second Europe, which remains largely concealed from the public, currently exists in parallel to the public Europe of summit meetings, government statements and official visits. Behind the closed doors of government headquarters, finance ministries and central banks, European governments are preparing for the worst-case scenario: Greece is unable to avert bankruptcy on its own steam, forcing its European partners to intervene.

A top-secret team of half a dozen experts has been working on the bailout measures for weeks. The team includes Jörg Asmussen, a senior official in the German Finance Ministry, and his French counterpart. The ECB is represented by its chief economist, Jürgen Stark, and a senior official represents the European Commission. Alternating representatives of other potential donor countries are also taking part in the discussions.

The team is far along in its preparations. "We could pay out the money in 48 hours, if necessary," Asmussen recently told his boss, German Finance Minister Wolfgang Schäuble, a member of the conservative Christian Democratic Union (CDU). The bailout package will consist of loans and loan guarantees that the participating euro countries will make available to Greece. The package would be worth up to €25 billion, with Germany assuming about 20 percent of the burden. The team has dismissed concerns that a bailout could be in violation of European Union treaties. For them, the top priority is to preserve the integrity of the monetary union. If the program were implemented, the guaranteed bonds would essentially no longer be Greek bonds, but securities with a German risk premium.

It would be the worst-case scenario for a German government that has consistently emphasized its intention to avoid assistance payments to other euro countries at all costs. It would also serve as proof that the European Monetary Union is poorly designed, and that the euro zone's members are tied together in a way that German politicians have always categorically ruled out: namely that Greek debts are German debts.

It would also be the definitive euro lie, because Article 125 of the Treaty on the Functioning of the European Union, the so-called "no bailout" clause, states unequivocally: " A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State."

'Muddled Vision'

More than two decades ago, when the first serious discussions about a common European currency began, many experts feared that this would be a fair-weather clause. At the time, in the late 1980s, French politician Jacques Delors, the then-president of the European Commission, proposed a common European currency. The idea met with head-shaking and resistance in Germany, particularly among central bankers in Frankfurt.

The Delors proposal was "a muddled vision" with "wild ideas," Karl Otto Pöhl, the then-chairman of Germany's central bank, the Bundesbank, later told author David Marsh. Pöhl didn't believe that a monetary union would materialize within the foreseeable future. "I thought that maybe it would happen sometime in the next 100 years," he said.

But Germany's top central banker had underestimated the sheer force of political events. The fall of the Berlin Wall triggered the resurgence of old fears of German economic dominance, particularly in France. At the time, French President François Mitterrand believed that a monetary union was a suitable means of destroying the dominant position of the German currency. In return for agreeing to part ways with the German mark, Chancellor Helmut Kohl secured France's approval of German reunification and, for himself, a second entry into the history books: Not only was he the chancellor behind German unity, he could also take credit for a common European currency.

Political factors carried the euro to victory, while the concerns of economists were swept aside. Former German Economics and Finance Minister Karl Schiller, for example, complained that the German mark would dissolve in the new monetary union "like a sugar cube in a glass of tea." Critics warned that the monetary union could only work if accompanied by a political union, otherwise the member states' diverging decisions on financial and economic policy would soon tear apart the monetary union.

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