The sinking euro

Charlemagne


The sinking euro


Denial and delusion in Brussels, as the single currency founders




Nov 26th 2011 | from the print edition

• 
  
• 
  

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”.


In this section

• Mañana belongs to Mariano
  

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 bondsale
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.
Browse all The Economist's euro crisis covers with our interactive carousel

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.