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


Part 5: Drifting Apart

It isn't just the culture of trickery that undermines the basis of the euro. It is also harmful that each country continues to pursue its own financial policy, lowering taxes or government spending as it pleases. As a result, a level economic playing field has not developed among the member states as hoped. In fact, they have drifted further apart.

On the one side are the EU's heavyweights, headed up by Germany. The new currency has made them more competitive, and they now produce far more than they consume. On the other side are countries like Spain and Ireland, which attracted large amounts of foreign capital, and where wages and asset prices rose rapidly. In the past, these countries' central banks would have promptly devalued the peseta or the Irish pound, thereby strengthening exports. But this safety valve has been sealed off by the common currency.

Another design flaw in the Maastricht Treaty is the no-bailout clause. Under this principle, each country must take responsibility for its own national debts. Of course, this rule has never been credible.

Otmar Issing, the former chief economist at the European Central Bank, insists that the clause allows no room for compromises. Current German President Horst Köhler was one of the architects of the Maastricht Treaty back when he was a senior official in the Finance Ministry. When asked in a 1992 SPIEGEL interview whether the monetary union could allow a country to go bankrupt, he replied: "Why not?" But such assurances seem to lose their value as soon as push comes to shove.

A De Facto Agreement

Last February, then-Finance Minister Peer Steinbrück openly stated that if one of the euro countries encountered financial difficulties, "the community will have to come to its aid." There is a de facto bail-out agreement among the euro countries, says Hamburg economist Dirk Meyer, noting that the no-bailout clause is "not workable."

Many now feel vindicated, including Harvard Professor Martin Feldstein, a prophet of the euro's demise for many years. This is the sort of thing that happens when different countries are forced to live with one interest rate that isn't appropriate for all members, says Feldstein, who warns of something he already predicted 15 years ago: the dissolution of the monetary union.

The German foes of the euro, led by economist Wilhelm Hankel and Wilhelm Nölling, a former chairman of the State Central Bank in Hamburg, are also feeling revitalized. They have even threatened to file a complaint in Germany's Constitutional Court if Greece, in violation of treaty provisions, does in fact receive help from Germany.

Naive Considerations

It has long been under discussion whether Greece should simply be ejected from the monetary union or should voluntarily abandon the euro. The boldest critics have even suggested that Germany reintroduce the German mark, so that it will not have to take responsibility for foreign debts.

But such considerations are naïve. It's possible that the euro was indeed introduced too soon. But that is by no means an argument to abolish it prematurely.

It is clear that a fracture in the monetary union would not just be a political disgrace, but also an economic catastrophe. For 10 years, European businesses and banks have become accustomed to a uniform European basis of calculation. Reversing it would trigger economic disruptions so severe that the Greek crisis pales by comparison.

Europe doesn't need a new currency. What Europe does need is the culture of stability, transparency and credibility that its governments have promised citizens, but have never created. Although the euro zone has a common monetary policy, it lacks a shared financial and economic policy.

'The Stability Pact Is Not Enough'

The crisis has exposed the deficiencies. "It has become clear that the Stability Pact is not enough," says Clemens Fuest, an economics professor at Oxford University and chairman of the economic council in the German Finance Ministry. But he also believes that the remainder of the treaty that gives the euro its legal framework is inadequate.

Government experts are already thinking about whether the monetary union needs its own stabilization fund, modeled after the International Monetary Fund. They also believe that the Stability Pact needs to be strengthened.

Some are considering ways to beef up the treaty so that the fraudulent culture of past years can be eliminated once and for all. One idea is to require member states to obtain the approval of the remaining nations if they intend to run deficits above the 3 percent threshold.

Even if the Germans are far from supporting a European economic government, as the French have long advocated for the euro zone, the German government believes that cooperation on economic policy must be coordinated far more closely and intensified in the future.

Bearing the Burden

Government officials have also thought about creating an insolvency statute for member states of the monetary union. Economic Council Chairman Clemens Fuest has already envisioned what it could look like. With such a statute in place, an affected country would be able to petition for its own insolvency.

In return for debt relief, it would be subject to harsh conditions from partner countries. It is important, says Fuest, that the donor nation be required to bear a portion of the burden by cancelling some of the troubled country's debt. He reasons that donors will be more cautious from the start if they are stuck with a portion of their loss.

The changes could arrive more quickly than expected, because there has been a noticeable change of awareness in the governments of the euro zone. In the past, it was assumed that small economies on the periphery could not pose a threat to the monetary union. This assumption was one of the arguments that was used to dispel doubts over whether Greece was even ready to be a member of the euro zone.

The recent crisis shows, however, that even small countries can jeopardize the entire common currency project. "European leaders are now realizing that the members of the monetary union are all in the same boat," says one senior Brussels diplomat, "and that its members, for better or worse, are dependent on each other."


Translated from the German by Christopher Sultan


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