Europe: Too Big to Fail?

Drama and Drachmas on the Mediterranean

It’s been a fun 65 years, but the Pax Europa is on the way out. The sovereign debt crisis has put so much strain on the European Union that the system of cooperative confederacy that has prevailed since the Second World War has been hopelessly compromised.

There were good times to be sure. If you were really lucky, you got to bunga bunga alongside Silvio Berlusconi as Rome’s economy burned. But the years of cheap credit, flash-frozen by the mortgage crisis across the pond, have left an irreconcilable divide between the creditors and the debtors. Now the Eurozone faces an existential crisis as all involved decide whether the union can be saved. As leaders from creditor nations scramble to create a combination of fiscal integration and austerity that could possibly save the common currency, the member nations are left with two unsavory options: fracture the Eurozone or preserve the union at the cost of individual sovereignty.

This current crisis epitomizes what critics of European economic integration feared. A liberal flow of credit was the peace dividend of continental stability and growth. This easy money, alongside the consequent housing bubble, allowed Greece and others to finance luxurious social programs and high wages. Tax evasion became widespread. When the music stopped during the financial crisis of 2008, countries in crisis had no way to adapt their economy to the new situation. Traditionally, a nation could simply inflate its way into solvency or devalue its currency to spur exports. Painful solutions, but ones that can rescue a nation’s finances. Due to the common currency, though, these debtor nations had no such options.

Now, they must rely on the largesse of more financially stable members to prevent defaults. French and German leaders have attempted to create packages that will bail these countries out including, but not limited to, an International Monetary Fund loan package. A package like this in some form is ultimately the only way to save the economic union, and it needs to be passed quickly.

However, on both sides of the solution, parties are highly uneasy. Debtor nations fear the economic reorganization that will be required by whatever organization ends up rescuing them. The IMF, that symbol of post-Second World War global cooperation, is notorious for mandating unpopular political and economic reforms as a condition of its funding. Similarly, any package that goes through the EU will likely require those countries to submit their budgets for approval by the body. Any solution that involves a bailout will almost by definition infringe on individual nations’ sovereignty and bring everyone closer to a one-Europe government.

Germany, the white knight to whom everyone is looking, is dragging its feet for other reasons. Still bearing the scars of the hyperinflation that occurred during the Weimar Republic, it is hesitant to take any steps that could lead to spiraling inflation. A solution that is popular everywhere except in Germany is to fund the bailouts through the release of Eurobonds, thereby increasing the indebtedness of the entire union. Also, there is a fundamental sense of injustice among Germans indignant about being forced to subsidize other nations’ profligacy.

As a result of these aversions to the solutions that would save the Eurozone, many expect the common currency to fracture or dissolve. The fears of being dragged into an inflation spiral could bring Germany and other like-minded countries to withdraw from the Euro and create a new currency. Or the fears of being subjugated to the demands of the rest of the continent would encouraged some debtor countries to withdraw and manipulate a new currency to sacrifice economic strength for political sovereignty.

Whichever way it happens, changing the membership composition of the Euro would have devastating economic consequences. Depending on the way creditor nations go, the Euro could either skyrocket or plummet in value, which would have massive consequences on the foreign exchange and would add a whole new level of volatility that would constrict worldwide capital flows. A new global recession would be almost inevitable.

So now the Eurozone faces a critical decision point. Is it worth a further consolidation of continental governance, and the corresponding escalated economic interdependency to save the union? From a world markets standpoint—yes. In fact, an auction of German bonds last week left over a third of the offering unsold, demonstrating that the market is losing its confidence in even the strongest of European economies. But the prospects of building a lifeboat before the currency sinks into the sea dwindle by the day. Even if a solution is passed and accepted, the members of the Eurozone will find themselves even more hopelessly intertwined and further on the road toward centralized governance from Brussels.

The Greeks brought democracy into this world, and it looks like they can help to take it out, too.

Sam N. Adams ‘14 is a social studies concentrator in Currier House. His column appears on alternate Wednesdays.