The euro’s big fat failed wedding
By Gideon Rachman
Published: March 29 2010 19:28
Somewhere in the attic I have a home-made poster of 12 old European currencies that I assembled, in a fit of nostalgia, just before they were all made obsolete by the appearance of the euro at the stroke of midnight on December 31 2001.
The old notes have portrayals of real people and places on them; the Greek drachma bears a picture of the ruins of Olympia, the French franc a portrait of Paul Cézanne. The euros that replaced them are decorated with buildings that look vaguely European but actually correspond to nowhere in particular.
It always struck me that the imaginary designs on the euro notes said something about the fragile identity that underpins the single European currency. If Europeans could not even agree on common symbols and shared heroes, would they really be able to agree on common policies and shared sacrifices when the going got tough?
Greece’s debt crisis is the most serious test yet for the euro. Last Thursday a deal was agreed that would allow Greece to borrow from the International Monetary Fund and its European partners, if it needs to.
This might settle the markets down for a while. But it does nothing to address the underlying problem. The creators of the euro were like parents fixing an arranged marriage. They knew that they were locking together countries with very different economies and political cultures. But they hoped that, over time, the new partners would grow together and form a genuine union.
In fact, the European Union was banking on three forms of convergence: economic, political and popular. At the time the euro was launched, there was much hopeful talk that a surge in trade and investment between the eurozone nations would create a truly unified European economy, in which national levels of productivity and consumption would converge on each other. It was also assumed – or perhaps just hoped – that the euro would create political convergence. Once Europeans were using the same notes and coins, they would feel how much they had in common, develop shared loyalties and deepen their political union.
Finally, the designers of the single currency were hoping for a third form of convergence, between elite and popular opinion. They knew that in certain crucial countries, in particular Germany, the public did not share the political elite’s enthusiasm for the creation of the euro. But they hoped that, in time, ordinary people would embrace the new single European currency.
What the Greek crisis shows is that Europe’s brokered marriage is in deep trouble. The partners have not grown together. For a long time, countries such as Greece and Portugal benefited from the illusion of economic convergence through the lower interest rates and stable currency that the euro brought with it. When the European economy was growing, the markets indulged the fantasy that there was little to choose between Greek and German debt. But that has now changed – and Greece has to pay a significant premium on its borrowing.
It is also now obvious that countries such as Greece, Spain and Portugal are struggling to compete with the much more productive German economy. In a currency union they cannot devalue their way out of trouble. The only alternative solution on offer is a long and painful period of austerity to reduce their costs through cuts in wages and living standards.
This lack of economic convergence has revealed the lack of political convergence around a shared European identity. There is a striking lack of sympathy for the Greeks from Germany, Europe’s largest economy. The German position seems to be that the weaker European economies are paying the price for not being as hard-working and skilled as Germans – and must now shape up or ultimately leave the euro.
Any suggestion that German under-consumption and export-addiction might have something to do with the crisis in the euro-area is brushed aside. Some Greek politicians have responded to German pressure with angry references to the Nazis’ brutal occupation of their country during the second world war. So much for European solidarity.
Germany’s hard-line position reflects the fact that the third convergence – between elite and public opinion – has also failed to take place. The German public is still deeply wary of the consequences of currency union, fearing that Germans will be called upon to maintain feckless Greek politicians and pensioners in the style to which they have become accustomed. With crucial regional elections coming up in May, Angela Merkel, the German chancellor, is at pains to show how tough she is being with Greece.
When the euro was launched, leading German politicians used to argue, with evident relish, that monetary union would eventually require political union. The Greek crisis was precisely the sort of event that was expected to force the pace. But, faced with a defining crisis, Ms Merkel’s government is avoiding airy talk of political union – preferring instead to force harsh economic medicine down the throats of the reluctant Greeks.
Increasingly the euro looks less like an indissoluble union, and more and more like an unhappy marriage between incompatible partners. Perhaps I should go and fish those old European currencies out of the attic. They might be less obsolete than I thought.
Copyright The Financial Times Limited 2010.
Published: March 29 2010 19:28
Somewhere in the attic I have a home-made poster of 12 old European currencies that I assembled, in a fit of nostalgia, just before they were all made obsolete by the appearance of the euro at the stroke of midnight on December 31 2001.
The old notes have portrayals of real people and places on them; the Greek drachma bears a picture of the ruins of Olympia, the French franc a portrait of Paul Cézanne. The euros that replaced them are decorated with buildings that look vaguely European but actually correspond to nowhere in particular.
It always struck me that the imaginary designs on the euro notes said something about the fragile identity that underpins the single European currency. If Europeans could not even agree on common symbols and shared heroes, would they really be able to agree on common policies and shared sacrifices when the going got tough?
Greece’s debt crisis is the most serious test yet for the euro. Last Thursday a deal was agreed that would allow Greece to borrow from the International Monetary Fund and its European partners, if it needs to.
This might settle the markets down for a while. But it does nothing to address the underlying problem. The creators of the euro were like parents fixing an arranged marriage. They knew that they were locking together countries with very different economies and political cultures. But they hoped that, over time, the new partners would grow together and form a genuine union.
In fact, the European Union was banking on three forms of convergence: economic, political and popular. At the time the euro was launched, there was much hopeful talk that a surge in trade and investment between the eurozone nations would create a truly unified European economy, in which national levels of productivity and consumption would converge on each other. It was also assumed – or perhaps just hoped – that the euro would create political convergence. Once Europeans were using the same notes and coins, they would feel how much they had in common, develop shared loyalties and deepen their political union.
Finally, the designers of the single currency were hoping for a third form of convergence, between elite and popular opinion. They knew that in certain crucial countries, in particular Germany, the public did not share the political elite’s enthusiasm for the creation of the euro. But they hoped that, in time, ordinary people would embrace the new single European currency.
What the Greek crisis shows is that Europe’s brokered marriage is in deep trouble. The partners have not grown together. For a long time, countries such as Greece and Portugal benefited from the illusion of economic convergence through the lower interest rates and stable currency that the euro brought with it. When the European economy was growing, the markets indulged the fantasy that there was little to choose between Greek and German debt. But that has now changed – and Greece has to pay a significant premium on its borrowing.
It is also now obvious that countries such as Greece, Spain and Portugal are struggling to compete with the much more productive German economy. In a currency union they cannot devalue their way out of trouble. The only alternative solution on offer is a long and painful period of austerity to reduce their costs through cuts in wages and living standards.
This lack of economic convergence has revealed the lack of political convergence around a shared European identity. There is a striking lack of sympathy for the Greeks from Germany, Europe’s largest economy. The German position seems to be that the weaker European economies are paying the price for not being as hard-working and skilled as Germans – and must now shape up or ultimately leave the euro.
Any suggestion that German under-consumption and export-addiction might have something to do with the crisis in the euro-area is brushed aside. Some Greek politicians have responded to German pressure with angry references to the Nazis’ brutal occupation of their country during the second world war. So much for European solidarity.
Germany’s hard-line position reflects the fact that the third convergence – between elite and public opinion – has also failed to take place. The German public is still deeply wary of the consequences of currency union, fearing that Germans will be called upon to maintain feckless Greek politicians and pensioners in the style to which they have become accustomed. With crucial regional elections coming up in May, Angela Merkel, the German chancellor, is at pains to show how tough she is being with Greece.
When the euro was launched, leading German politicians used to argue, with evident relish, that monetary union would eventually require political union. The Greek crisis was precisely the sort of event that was expected to force the pace. But, faced with a defining crisis, Ms Merkel’s government is avoiding airy talk of political union – preferring instead to force harsh economic medicine down the throats of the reluctant Greeks.
Increasingly the euro looks less like an indissoluble union, and more and more like an unhappy marriage between incompatible partners. Perhaps I should go and fish those old European currencies out of the attic. They might be less obsolete than I thought.
Copyright The Financial Times Limited 2010.
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