Economic crises appear to have driven a wedge through the eurozone
Tension, resentment are growing between some of the countries involved in bailouts
National governments are also a common target for popular anger
Experts say the eurozone is flawed but too important to give up on
When the euro became official tender 12 years ago, it was hailed as an economic and social savior, “the beginning of a strong European Union,” according to the EU’s top official at the time.
But now, in the middle of several economic crises, its effectiveness is coming into question.
“The euro was sold to Europeans by politicians as a brilliant way of integrating Europe more. The irony is that it has had exactly the opposite effect,” said Harvard historian Niall Ferguson. “It is causing the disintegration of Europe.”
There is considerable tension growing between two sets of nations in the eurozone. On one side are struggling countries, such as Greece and Italy, that are badly in need of economic rescue. On the other side are countries, such as France and Germany, that are funding bailouts and demanding tough austerity measures in return.
“Right now, things between the Germans and the Greeks, I don’t think it’s an exaggeration to say this is the worst it’s been since Germany invaded Greece in 1940 in the war,” said Clay Clemens, a professor of government at the College of William & Mary. “The rhetoric on both sides, it’s toned down a little simply because I think the politicians at the top realized we have got to restrain ourselves.
“But a couple months ago, there were German politicians sort of saying well, if the Greeks don’t have any money, they can lease some islands as collateral. And that of course only fueled those in Greece, who talked about Nazis in Berlin. That relationship is always a bit strained, but it’s really gone now.”
It’s not just the politicians who are angry, said Eleanor Zeff, an associate professor of politics and international relations at Drake University.
Zeff was in Greece this summer and spoke to many people who expected Germany, the largest economy in Europe and the biggest financier of the Greek bailout, to show more support and understanding for the strict cutbacks it was calling for. “Boy, they hated the Germans,” Zeff said.
But in Germany, there has been significant opposition to bailing out Greece at all. It was very difficult for Chancellor Angela Merkel to get a consensus behind the idea of letting struggling countries “off the hook,” Clemens said.
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The result is a divided eurozone and perhaps its first real test.
“What it’s testing is the sort of hope, I guess, that the EU had when it went into the euro: that a common currency and common bank and a few things like that would be enough to bring everybody together,” Zeff said. “And in fact, it looks like it isn’t quite enough. …
“With economic growth, everyone was benefiting. But when the economic downturn came about, some countries ended up not benefiting, and then that sort of pulled people apart.”
Governments are also being pulled apart. Italian Prime Minister Silvio Berlusconi is expected to step down after austerity measures are approved in his country. He would be the fourth prime minister in the eurozone to give up power this year, following George Papandreou (Greece), Jose Socrates (Portugal) and Brian Cowen (Ireland).
“The economic consequences of a single currency are so negative for so many people in the eurozone that there is a full-blown backlash under way,” said Ferguson, the Harvard historian. “The national governments are the prime target for popular anger, which is why so many of them are being overthrown.”
Too big to fail?
Many experts agree that a major problem with the eurozone is a lack of control and enforcement power. Seventeen countries share a common currency, but all 17 have their own fiscal policies.
“Essentially, they can’t keep all these countries in line,” Zeff said.
Ferguson said the eurozone was also inherently divisive because not everyone in the European Union joined it. There are 27 members of the EU today, 10 of which do not use the euro.
But for all its shortcomings, many agree it’s too late to go back now.
“The disruptive effect of dismantling the eurozone and restoring national currencies has to be in the mind-boggling category,” Ferguson said. “Just take Greece as an example. If you say, ‘OK, we’re going back to the drachma, people,’ every single company that owes people outside Greece money is bankrupt instantly. And the only way to solve that would be through all kinds of painful legal wrangles.
“It’s much harder to dismantle this thing than it was to assemble it. And that was what we warned about at the time, those of us who were critical. We said the problem with this is you have no exit.”
Even amid the anger and the growing resentment, most Europeans understand the importance of the eurozone’s success, Clemens said.
“They realize pragmatically that the euro brings benefits,” he said. “They also realize the cost of really removing yourself from the euro is just unimaginable – what it would be for them individually and what it would be for Europe as a whole.”
So what is the solution? It could be major changes to the way the eurozone is run. The European Central Bank could behave more like the Federal Reserve in the United States, Ferguson said. Countries might have to give up some national sovereignty for an across-the-board fiscal policy. But then what about the 10 EU countries that aren’t in the eurozone?
“My hypothesis is that the euro will survive, because it’s so expensive to get rid of it,” Ferguson said. “But the EU will be a casualty. … We may find ourselves in a weird situation where the euro survives, but the EU, the bigger entity, begins to fall apart.”