In the 1990s, as they prepared to launch the euro, the continent’s political leaders said they couldn’t imagine a Europe without Athens or go forward without the glory of Rome.
While some finance ministers and many economists around the continent worried whether the fiscal policies and economic cultures of more than a dozen countries could be united under one currency, politicians answered forcefully – even poetically. The divisions of the past were past, they argued; a single currency would bind a continent that so often had been torn by war.
Today, as Greece seems likely to leave the euro – and with Ireland, Italy and even France deep in debt and hampered by the single currency – Europe’s bold fiscal experiment faces its gravest crisis yet. But all these problems were predictable: From its inception, the move to the euro was not as much about money as about political unity and guarding against another European conflict. The economics were always known to be, at best, difficult.
The financial crisis has erased those attempts at unity, said European political expert Richard Whitman of the University of Kent in England.
“This first cut has released all the old demons,” Whitman said. “We’re back to calling the Greeks lazy, the Italians shady, the British disconnected, and the Germans bent on domination. It didn’t take long, did it?”
While talk about what’s wrong with the euro focuses on complex matters – national debt ratios, labor market reforms, pension protections – one fundamental problem with the currency now shared by 17 nations is simple: Blame Hitler.
After the fall of the Berlin Wall, a newly unified Germany was bent on leaving behind not only its recent division but also the much darker and more threatening past of World War II. Germany had to make sure the rest of Europe knew it now came in peace, and the best way to ensure that was to tie its own success to that of its neighbors.
Helmut Kohl, then the German chancellor, called it “a bit of a peace guarantee.”
Germany and France, the drivers of the euro project, pushed to be as inclusive as possible despite the economic risks. In fact, had all nations followed the rules they signed up for upon joining the eurozone, say experts, this crisis could have been avoided.
Among them: Nations must not carry debt greater than 60 percent of their gross domestic product. Yet Greece’s debt ratio is 165 percent, Italy’s is 120 percent and Ireland’s is 107 percent, according to the CIA World Factbook. France’s debt ratio is 86 percent and stable Germany’s is 81 percent.
For comparison, the CIA lists the United States at 69 percent, although that number that does not include Social Security debt, which would bump the U.S. number up to around 100 percent.
European officials identified Greece as a problem from Day One of eurozone discussions.
The Greeks, after all, were wedded to their retirement age of 55 (with sunbathed cafes on every corner, why not?) and saddled with red tape that made launching any new business almost prohibitive. The government had a reputation for not collecting taxes – $65 billion in back taxes are now outstanding – and overall, Europeans regarded its economy as a mess.
But Greece also had the Acropolis. It was the cradle of European civilization, the birthplace of democracy. How could such a place be left out of a greater Europe?
“The decision to let in Greece was purely sentimental,” said Jeffrey A. Frankel, an international finance professor at Harvard University’s Kennedy School of Government. “That’s a sign that they weren’t moving forward in the best way possible in forming their new currency.”
Greece was an extreme example, but many countries had debt and labor regulation problems. Even beyond specific policy concerns was this: While sharing a single currency, individual nations would continue to handle their own tax and pension programs. Local politicians, therefore, respond to local wishes before considering eurozone needs.
“The nickname is ‘one-size-fits-none monetary policy,’” said Kathleen R. McNamara, director of Georgetown University’s Mortara Center for International Studies. “Now, the truth is it’s astonishing the European project has come as far as it has. Seventy years ago, with Greece as weak as it is, it would have been invaded. This is a good thing. But to say that makes the euro work is magical thinking.”
In some ways, the currency delivered what everyone wanted. The southern nations had traditionally tied their unpredictable currencies to the German deutschemark but didn’t like the constant devaluations that entailed. The French were looking for a bold expansion of their European dream and favored the stability of the German model. The northern countries were looking for greater integration. Their smaller economies could use room to grow, and the currency stabilized that.
The Germans wanted to assure Europe they were now part of a whole and wouldn’t launch another war. But that sort of talk was all political.
Experts say the notion that countries that weren’t abiding by agreed-upon debt ratios or hadn’t made needed reforms would suddenly grow into the responsibility of a shared currency was laughable.
Adriaan Schout, a European expert at the Clingendael Institute in The Hague, said that the euro rules include penalties on countries for noncompliance – but he pointed out that in reality, those fines would never be paid.
“What country will agree to pay fines for acting on its own policies?” Schout said. “Politicians will vote to spend beyond their means, then vote to pay the fines for that? Politicians know they’d never survive an election after that.”
Protecting the euro meant restricting who was let in. But those decisions also were political. The German newsmagazine der Spiegel reported this week that in 1998, Dutch officials complained to Germany that “without additional measures on the part of Italy . . . acceptance into the eurozone is currently unacceptable.” German officials balked . If Rome was out, Chancellor Kohl said, Paris was out, and that just wasn’t possible, according to the magazine.
McNamara said little of this is surprising.
“Currencies are deeply political,” she said. “The dollar wasn’t accepted as the single American currency until the Civil War, and there wasn’t a lasting U.S. central bank for half a century after that.”
And the United States was a single nation, able to impose a single fiscal policy. If Europe was to do that, it would mean either a mishmash of policies or that everyone would agree to follow German rules. Stephen Kinsella, an economist at the University of Limerick in Ireland, pointed out that one failure of the currency was that it allowed Ireland’s debt to be treated the same way as Germany’s debt – which would be a mistake, he argued, because Germany has a much more robust economy.
Which means the European Central Bank established to regulate the common currency has to serve both a booming German economy and a tanking Greek one. It has to keep interest rates low to spur borrowing and growth in the south, while keeping rates high enough to avoid inflation in the north.
Paola Subacchi, a European expert with London’s Chatham House think tank, said that a single fiscal policy would be only part of a solution. A total solution would have to address the inequities between national economies. This won’t be easy, she said, and it may not be possible.
“For Greece, that means it would have to be totally redone,” she said. “But, again, it is a political decision, not an economic one. Right now, the Greek people want not to meet the terms of their last bailout, but also not to leave the eurozone. They cannot have it both ways.”