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The Coming Euro Crack-Up

A currency divided against itself cannot stand.

May 9, 2011, Vol. 16, No. 32 • By IRWIN M. STELZER
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So much for the least important stuff. The more important question is whether Spain, its economy twice as large as those of Greece, Portugal, and Ireland combined, will be next when the bond vigilantes again saddle up. So far, the contagion has not spread. But Spain has an unemployment rate of over 20 percent (40 percent for young workers) and rising, its regional banks (cajas) have so many IOUs from property developers gone bust that some failed the rather lax first round of stress tests, and Moody’s says the nation’s banks will have to raise as much as 120 billion euros in fresh capital (the government puts the figure at 15 billion euros, despite the fact that Spain’s banks and companies have 70 billion euros invested in Portuguese assets, 7 percent of Spain’s GDP). Throw in forecast growth of “close to zero” according to Citigroup Global Markets and the inability of the central government to persuade the regions to rein in their huge deficits, and it is not inconceivable that Spain will soon need a handout of such size that even the euro-enthusiasts will not be able to come up with the needed cash. “Spain’s room for maneuver is limited,” say the economists at Fathom Consulting.

Spain is only one of the important problems facing Europe. Voters are beginning to ask why they should suffer through painful austerity programs to spare imprudent bankers from the consequences of their foolishness. The Greeks have taken to the streets and are refusing to pay tolls on bridges; the Portuguese parliament refused to agree to an austerity program and the government fell, as did Ireland’s after putting an enormous burden on taxpayers to prevent the failure of its banks; and the Spanish prime minister had to agree to fall on his sword after pushing an austerity program through parliament. More important, Angela Merkel has had to postpone putting up more bailout money because the Bundes-tag is dragging its feet. Meanwhile France’s Nicolas Sarkozy, a proponent of bailouts accompanied by a Brussels seizure of control of a nation’s finances as part of a centralized European “economic government,” has a popularity rating in the low 20s.

This seems to be just one part of the increasing pressure on the entire concept of a united Europe. When Germany refused to go along with Britain and France in attempting to stop the slaughter in Libya, it called into question the concept of a European Common Foreign and Security Policy, notwithstanding the enormous resources being poured into the newly established European External Action Service, a euphemism for a full-fledged foreign service. And when France resurrected border controls and check points to prevent a flood of Tunisian immigrants from Italy, and Italy retaliated by issuing travel documents to some of the 25,000 immigrants who were passing through Italy en route to the EU country thought to have the most generous benefits, it put a serious dent in the concept of the free movement of peoples throughout the EU. Finally, a chasm has opened between the prosperous north and the less-hard-working south; between the 17 EU members that comprise the eurozone on one side and the 10 other EU members who have their own currencies and want no part of the bailouts; within the gang of 17, between Germany and Finland; and between the exporting machine that is Germany and protectionist France. 

The vision of a united Europe still has a powerful hold on the elites of Europe, who see the transfer of power from nation-states to an unelected bureaucracy as insurance against future wars and, if truth be told, a relief from democratic pressures. In addition, the prospect of a euro that would replace the dollar as the world’s reserve currency, or at least weaken its role in world trade, has a powerful hold on the French, who make no secret of their antipathy to Anglo-Saxon capitalism. 

The “European project” won’t go quietly into the night. But it just might go noisily into the ashcan of history if the Germans decide they cannot convert the Greeks into hard-working, tax-paying euro-citizens worthy of continuing handouts. Or, at minimum, we might end up with a euro-nord and euro-sud, as Martin Feldstein once suggested. Such a distinction, rooted in differences between the stronger and weaker economies and banking sectors, would allow Greece and -others to do what the team of Obama and Bernanke seem to be planning: get rid of all those annoying debts by paying them off in a depreciated currency.

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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