It has been easy to snicker in recent weeks at the politicians who designed the euro, which appears on the verge of collapse after a decade as the common currency of a dozen countries in the European Union. Last May, the continent’s finance ministers put together a $145-billion package to bail out the corrupt Greek state. When that failed to calm markets, a new trillion-dollar European Financial Stability Facility was set up with money from the EU and the International Monetary Fund. It was meant to awe any speculators away from betting against the euro. It didn’t work.
Since October, the yields on Irish, Portuguese, Spanish, and even Italian and Belgian bonds have risen dangerously. While Americans were celebrating Thanksgiving, European finance ministers tapped the EFSF to buy Irish bonds and set up a fresh $113-billion rescue plan. The numbers surrounding the plan sound like a joke. It comes to about $25,000 for every man, woman, and child in Ireland. Ireland’s budget deficit is 32 percent of GDP.
When you look at the debts that other countries have to roll over very soon—Italy, for instance, reportedly needs to raise well over $150 billion in the first quarter of next year alone—the sufficiency of the EFSF looks dubious, and the political landscape across Europe looks apocalyptic. The Irish government will fall when the Green party leaves it in a month. Silvio Berlusconi faces a confidence vote in Italy on December 14. Demonstrations against austerity programs have degenerated into riots not just in Greece but also in France.
The euro deserves a lot of the blame. By tethering dynamic Ireland to interest rates more suitable to the sluggish economies of Central Europe, it sparked a housing boom more excessive than even that of the United States. Today, Ireland’s marriage to the euro deprives it of the main instrument—devaluation—that countries have traditionally used to export their way out of such financial messes. The economists who said that you cannot unite countries in a single currency unless you unite them under a single central government have been proved right.
As we contemplate the macroeconomic storm that is now passing through Europe, we must bear in mind that this is a storm that the EU’s promoters knew would come. The euro’s designers understood Rahm Emanuel’s philosophy about not letting a crisis go to waste. “Europe will be forged in crises,” the European Community’s founding father Jean Monnet wrote in his memoirs, “and it will be the sum of the solutions brought to these crises.” When the French statesman Jacques Delors laid out his plan for the euro in the late 1980s, he drew a clear trajectory: A common market had made possible a common currency. A common currency would make possible a common government.
But how would that happen? After all, if a currency worked well within the existing political arrangements, there would be no reason for those arrangements ever to change. New institutions could result only from the currency’s blowing up. Economic crisis would be the accidentally-on-purpose pretext for replacing a system based on parliamentary accountability with a system based on the whims of a handful of experts in Brussels. Europe’s countries now face the choice of giving up either their newfangled money or their ancient national sovereignties. It is unclear which they will choose.
How the euro started
The ideals behind the euro have a lot in common with the ideals behind the European Union. The single currency is the monetary expression of Europeans’ hurt pride, desire to cut a figure on the world stage, and impatience with that unique combination of sunny overconfidence and mismanagement that has often been the trademark of the American hegemon. Since World War II, the United States has supplied the world’s reserve currency. To borrow and to trade, European countries had no choice but to buy and hold dollars. This gave the United States what French president Valéry Giscard d’Estaing described as the “exorbitant privilege” of “issuing depreciating dollars as a means of funding massive foreign investment from which it derived a large surplus.” When the United States was profligate, Europe had to tighten money to avoid importing American inflation. According to the British journalist David Marsh’s authoritative history of the euro, John Connally, as Treasury secretary, once described the dollar to a European counterpart as “our currency, but your problem.”
(Lest anyone think the American privilege has disappeared, consider that the world’s speculators are now circling vulturelike over the weakening Eurozone economy because its deficits average 6 percent, and its total debts just over 80 percent, of GDP. Meanwhile, U.S. deficits are 11 percent of GDP and its total debt approaches 95 percent.)