The sinking euro

Charlemagne

Denial and delusion in Brussels, as the single currency founders

THE designers of the good ship euro wanted to create the greatest liner of the age. But as everybody now knows, it was fit only for fair-weather sailing, with an anarchic crew and no lifeboat. Its rules of economic seamanship were rudimentary, and were broken anyway. When it struck a reef two years ago, the water flooded one compartment after another.


“The situation is extremely serious, more so perhaps than at any point in the last 18 months,” José Manuel Barroso, the European Commission president, said this week. He announced two last-ditch initiatives to avert doom. One is a “green paper” on options for joint Eurobonds. To balance this mutualisation of debt, he also proposed stronger monitoring of national budgets by Brussels, including the right to recommend changes before they are submitted to parliaments, and fiercer oversight of countries “in severe difficulties”.
Renaming Eurobonds as stability bonds, the green paper is almost an act of insubordination against Angela Merkel, Germany’s chancellor. She is strongly against the idea and has also declared that only a treaty change can impose enough rules to ward off another disaster. Eurobonds and treaty change together just might make for a better vessel, but they would take years to put into effect. Why design a safer imaginary ship when the present real one is about to sink?
Mrs Merkel speaks often of the need to save the euro, but she acts as if there were no imminent danger. Germany has stayed dry. If other crew members are neck-deep in icy water, she thinks it serves them right; only the fear of God (and the bond markets) will teach them to be responsible. Yet there are clear dangers in this policy. One is that it provokes a mutiny against Germany. The second is that the Germans miscalculate. At some point a listing ship topples over, and Germany would plunge into the sea with everybody else. A German bond sale this week was alarmingly undersubscribed. A paper by Ulrike Guérot, of the European Council on Foreign Relations, a think-tank, expresses the fear that, rather like the Soviet Union, the European Union could go down quickly if the euro starts breaking up.
For now, there is a surreal atmosphere in Brussels. Like the band on the Titanic that played on to the end, the EU’s bureaucracy keeps producing studies, policies and regulations. At one briefing this week, officials said “this is a very good day, not just for European sharks, but for sharks worldwide.” This was no allusion to hated financial speculators. Instead, it was about a new ban on shark-finning, ie, the removal of fins from sharks caught in European waters or by European ships elsewhere.
European officials now recognise the folly of creating the euro without preparing for trouble. It would be wise to be planning now for what to do if it sinks. But officials have spent so long giving warnings of the horror of a Greek default, not to speak of its departure from the euro, that they cannot. “I prefer not to think about it,” says one.
Below decks the chatter is of European fonctionnaires scrabbling around for ways to protect their savings. But as an institution, the EU fears that even a hint of defeatism may spread panic. “If anybody wrote a paper on contingency planning for the break-up of the euro, it would leak out immediately,” says one official. Even now, after decades of “European construction”, many Eurocrats cannot conceive of the euro as a wreck. Those who have worked hardest to keep it afloat are exhausted and know it is not in their power to save it anyway.
Even national governments are not masters of their fate. Both Lucas Papademos and Mario Monti, the technocrats running Greece and Italy after their predecessors were cast overboard, came to Brussels this week to meet Mr Barroso and Herman Van Rompuy, president of the European Council (representing European leaders). Theirs looked like a council of the powerless.
If not the market, what of Merkel and Mario?
Nothing that Brussels, Rome or Athens can do is likely to impress the markets. The issue is whether they can impress those with the money: Mrs Merkel and Mario Draghi, president of the European Central Bank? Many proposals to save the euro—issuing Eurobonds, getting the ECB to act as a lender of last resort to governments (and not just banks) or using the IMF-issued reserves known as Special Drawing Rights—have been rejected by Germany, for both legal and political reasons. The ECB has offered valuable but strictly limited help. It is keeping its distance for fear of dirtying itself by lending to governments and, perhaps, stoking inflation. Salvation must come from political leaders, says Mr Draghi; why have they not acted on their October decision to boost the European Financial Stability Facility? “We should not be waiting any longer,” he says.

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In Brussels the belief (or perhaps just the hope) is that a show of reforming zeal by weaker members of the euro zone plus a determination by EU institutions to impose discipline could be enough to persuade Germany and the ECB to ease up. At some point, many argue, Germany must come to its senses. The situation is desperate. France may lose its AAA credit rating. Even the rigorous Finns and Dutch have seen bond spreads widen.
But no single action can save the euro. This is not just because Germany wants others to feel the pain for a long time, but also because the damage from poor leadership and procrastination is so extensive. The euro will require a full redesign through new treaties, with Eurobonds and possibly much else besides. If this is to happen, though, it must first survive. It is time for Mrs Merkel to grasp that her country risks being caught up in the euro’s catastrophic failure—and for Mr Draghi to admit that he risks finding himself without a job.