Crisis Hits Europe
Could the strains of bailing out EU members cause the euro's collapse?


John O’Sullivan

A sharpening panic is taking over the European commentariat as the financial crisis begins to bite deep into Europe’s previous complacency. It seems an age ago — rather than the two months it has actually been — that Europeans were congratulating themselves on having a more stable banking system than the benighted “Anglo-Saxons” and thus on observing America’s crisis from a comfortable and secure distance.

In the last day I have read three pieces worrying that Europe’s “four freedoms” — of trade, investment, movement of labor, and services — would soon be destroyed by nationalist governments seeking individual salvation in the crisis. The Financial Times’s Gideon Rachman even renounced his Euro-skepticism for the length of the crisis — which was a surprise since few people knew he was a Euroskeptic in the first place.

Every day brings news of fresh disasters, but the main current anxieties are (1) that Austrian banks that have loaned too much to Eastern Europe will collapse when Hungary and others default; (2) that Swedish investments in the Baltic states will similarly head south; and (3) that Ireland, Greece and Italy, all poised on the edge of bankruptcy, will between them cause a collapse of the euro.

So far, the worst horrors have not materialized. The protectionist “noises” heard from politicians, for instance, have proved just that — noises.

Sarkozy threatened to tie government aid to French car manufacturers to a guarantee that they would not divert production to Eastern Europe, especially to the Czech Republic. There was a brief furore. Then, yesterday, the French industry minister quietly withdrew this condition in a letter to the European Commission in Brussels. Sarkozy’s problem is that the Czechs are currently the holders of Europe’s rotating presidency — and he wants to be the bride at every wedding, the corpse at every funeral. French protectionism turned out to be just a tantrum.

Also, though the headlines all shrieked that the EU’s weekend summit had refused to bail out Eastern Europe with a huge loan demanded by Hungary’s post-communist premier, the small print again tells a different story. What actually happened was that Angela Merkel, on behalf of Germany’s long-suffering taxpayers, blocked a loan to Eastern Europe as a whole. Among other reasons, Poland and the Czech Republic were declaring they didn’t need such a loan — they’re quite stable, and all this talk of collapsing central Europe was harming their creditworthy image. Besides, the World Bank and various Euro-banks are putting together their own financial relief package for specific Eastern basket cases — a package that would therefore bail out Austrian and Swedish banks as well.

Will it be enough? Does the EU have the money for such generous outdoor relief? Ah, well, that’s a different story — the answer to which we’ll learn in due course.

And what of the impact on the euro of the imploding financial states of Ireland, Greece, and Italy? This is the really big story. Until the last few weeks, almost no one has been prepared to even speculate that the euro might collapse. But it is suddenly the topic of a thousand “counterfactual” scenarios.

The scenarios are especially counterfactual in this case, because almost no one has any idea of what a collapse of the euro would look like. What would actually happen? How would the mark, the franc, and the Dutch guilder be reborn? Would anyone accept Greek drachmas and Irish punts the day afterwards?

There are precedents for the collapse of a monetary union. One is almost eerie — the Latin Monetary Union, established in 1865. It was composed of France, Italy, Belgium, Switzerland, Austria-Hungary, Greece, and Spain — today’s Euroland without Germany, essentially — and collapsed in 1927. Its collapse, however, seems to have been relatively peaceful, even uneventful, because it had gradually been eroded by the dramatic political events of the early 20th century. The euro’s collapse would be nothing like that.

It would have been far wiser if the European political elites had embarked in more tranquil times on one of two reforms — either a liberalization of Europe’s economic and political structures that would return power and decision-making to national governments while maintaining Europe’s “four freedoms” in its single market, or the open establishment of a political union that could take the decisions needed to make a monetary union work. But they regarded the first kind of reform as anathema, and they lacked the guts to present the second kind of reform candidly to Europe’s various peoples. Now such decisions will be hammered out on the anvil of crisis.

In that crisis, Europe’s political establishments will accept almost any cost rather than see their dream of a European political union, resting on a European monetary union, evaporate and disappear. They will fight with all the reserves they have to stop such an outcome. But will they have enough reserves — either of money or of determination?

For the peoples of Europe may have their own vision of the future — and (except for Ireland, France, and Holland) they have not spoken yet.

– John O’Sullivan is an editor-at-large of National Review.