The Euro Saved — or Not?
How Europe has sacrificed prosperity to “unity” — and how it can stop.


John O’Sullivan

The euro is a political project at least as much as it is an economic one. As a result, it was put in place a decade ago with a number of features that a purely economic design would not have incorporated. It included too many countries; their economic characters were too divergent; their levels of unemployment, inflation, and productivity were too different; their financial structures for housing and pensions were in conflict; and so on, and so on. It was impossible to set a single interest rate that would be suitable for all these divergent countries. An interest rate that held back economic growth in one country would encourage reckless borrowing in another — by, incidentally, both the public and the private sectors. Also — unlike the dollar, the pound, the Swiss franc, and the renminbi — the euro was not governed properly. There was no economic government of the euro zone to run a Europe-wide fiscal policy in line with the European Central Bank’s monetary policy. And although these different features of the euro guaranteed economic dislocation and perverse outcomes, the euro zone did not have the three things needed to reconcile the differences or deal with the dislocations: namely, flexibility of wages; transnational labor mobility and migration; and transnational monetary transfers.

Union-heavy societies such as France would not tolerate wage reductions. Labor mobility between, say, Portugal and Poland was obstructed by kinds of cultural and linguistic differences that do not exist between Texas and Massachusetts. And Germany, as the EU’s banker of last resort, was strongly opposed to the ramping up of monetary transfers from rich to poor nations and regions.

As the euro gradually took shape, the economic decisions that had been made for political motives gradually undermined the currency. Yet because the euro was valued above and beyond economics, its practical difficulties could never be honestly faced by the politicians. The euro became a fetish for Germany’s political elites — and over time it became a fetish for all Europe’s political elites. And just as anyone who denied the “government fetish,” as Herbert Spencer put it, was described as a believer in laissez-faire and never heard from again, so anyone who denied the euro fetish was described as a euro-skeptic (and probably mad) and banished from the mass media to the obscurity of small opinion magazines.

Today it is hardly possible to deny that the deniers had a point. But the fetish continues to exert some power. A program to save the unreformed euro has been assembled by degrees. A version of it was proclaimed yesterday by the European Commission. An extremely broad international coalition — including the IMF, President Obama, David Cameron, François Hollande, the new Greek government, the European Commission, and European Christian Democrats and Social Democrats generally — has gathered to support it. First they are putting pressure on Mrs. Merkel to agree to debt mutualization. In return they will pay Mrs. Merkel’s price. Most of its members are ready in principle to endorse her condition that Brussels — which in this context is really Berlin in drag — would exercise economic supervision of those states whose debt repayments were being subsidized by Germany. They are also hopeful that her Fiscal Stability Compact from the turn of the year will evolve gradually into a full-blown European economic government on the basis of European political unity. And they tend to present this overall strategy as the only alternative to a disorderly breakdown of the euro, which, in their telling, becomes a worldwide economic catastrophe.

That is by no means certain. Any solution will be painful, and any will have some damaging consequences (and some unintended consequences, and some unpredictable consequences as well). As we shall see, however, there is another possible route: restructuring the euro — or, rather, several different possible ways of restructuring the euro. But here we come again to the fetish: There is a deep reluctance among the European political elites even to consider restructuring the euro. So they construct the choice as one between the debt mutualization plus Brussels budgetary supervision versus chaos and Götterdämmerung. And they then inevitably choose the former.

Let me offer five brief criticisms of this policy. The first, and most important, criticism is that the most it could achieve would be to stabilize, not end, the euro crisis. While the Mediterranean countries in the EU remain locked into the vertiginous exchange rate represented by the euro, they will be locked into economic austerity without end. At the same time, northern Europe will be locked into paying an endless flow of subsidies to them. This represents a loss of wealth at both ends of the transfer. And, long term, the result would be to transform Greece, Italy, and Spain, into one large Mezzogiorno or East Germany for decades. This is an opinion shared by two such different economists as Václav Klaus and Paul Krugman. That doesn’t mean it’s a correct view, of course; but it establishes the fact that it is not an eccentric or marginal view.