19 September 2011
Paul Gilfeather gilfeather@mediacorp.com.sg
Time is running out for one of the most ambitious political adventures of the last 100 years - the European Single Currency.
Yesterday the big beasts of the euro zone, France and Germany, were in a state of total paralysis as the currency they hoped would guarantee peace on the continent forever stared into the abyss.
I actually witnessed the birth of the euro 12 years ago. As a news reporter in London, I was dispatched to the German city of Frankfurt to cover the opening of the European Central Bank (ECB).
But I would be fibbing if I said that I thought the complex and diverging economies of Europe would live together happily ever after. Even then the union looked doomed to fail. But this is not a time for an "I told you so".
It brings me no joy to witness its demise, because such catastrophe presents only serious ramifications for the rest of the world.
At the weekend, German Chancellor Angela Merkel told her Parliament that "if the euro fails, then Europe too will fail". The EU is facing its worst crisis in 60 years. The current financial crisis, which began in Greece, now threatens to spread to other southern euro zone states, like Portugal, Spain and Italy. With this looming disaster comes the threat of the kind of riots and disorder we saw in Athens as the public rose up against austerity measures.
The big problem is debt - billions of euros of debt incurred by these countries when times were good. The danger now is that they will soon default on their sovereign obligations and effectively go bust. Such a crisis is now a distinct possibility and the outcome for the EU too terrible to consider.
What is needed more than ever is bold leadership from the aforementioned big beasts and a package of radical measures which goes beyond the sticking plaster repair job which has only succeeded in staving off disaster for a few weeks at a time.
Last week, in a move which smacked of total desperation, leaders of Europe and the International Monetary Fund put together a new mega-fighting fund to defend against sovereign defaults.
At the same time, British Prime Minister David Cameron travelled to Paris and Berlin to hear first-hand from French President Nicolas Sarkozy and Dr Merkel exactly what else they planned to do about the financial avalanche hurtling towards them.
The blame for this disaster sits fairly and squarely at their doors. The euro was always about Franco-German reconciliations and a banishing forever from Europe the spectre of war. It was also about allowing Germany, in particular, to become the most powerful nation in Europe without reawakening fears of domination.
The economic rules governing the currency seemed at the time of its launch to be almost an after-thought. Now the euro has come back to haunt Germany with a vengeance. With its enormous trade surplus, it cannot avoid helping to finance the deficits of states like Greece. This, after all, is monetary union and that equates to European solidarity.
But how will Dr Merkel sell another bail-out package to the German people if the Greek crisis is repeated elsewhere?
It was always difficult to see how monetary union could work, with members at different stages of economic development and stripped of the power of setting interest rates to fit their own economies.
Greece is often blamed for borrowing too much, running persistent trade deficits and falsifying statistics. But it was Germany and France who first broke the rules on budget deficits and had them relaxed.
Greece has come out and vowed never to abandon the euro, but behind the scenes it and many other governments are working on contingency plans to clear a path to total withdrawal should it come to that. You can include the euro zone's top two economies in that group.
DEFAULT DANGER
US Treasury Secretary Timothy Geithner arrived at a crisis meeting of EU finance ministers in Poland last week looking for answers. He turned up a day after his Federal Reserve joined forces with the ECB, the Bank of England, the Bank of Japan and the Swiss National Bank in a plan to lend funds over the next three months to dig Europe out of its financial crisis.
These same banks are facing major potential losses if indebted countries across Europe default on their loans. When a bank is rumoured to be in danger of suffering large losses other banks stop lending to it for fear of not getting their money back - a scenario that created the global credit crunch in 2008. This is why what happens in Europe matters to the rest of us; the threat to the global economy is that banks stop lending to businesses and growth is stifled.
But the three-month rescue package means that banks will be able to deal directly with cash shortages by borrowing US dollars directly from central banks across Europe. If this three-month rescue package does not help, then who knows what euro zone bosses will come up with next? Are Europe's leaders capable of admitting mistakes and finally facing reality? Have they left it too late?
The euro owes little to economics and much to politics. In the beginning Germany wanted a "no bail-out" clause to joining the single currency because they were worried about weaker economies like Italy and Greece. But the logic of currency union is that the strong countries assist the weaker ones.
Today, there are only two answers to the euro crisis. In the short term, they can pay up and in the longer term, break up. Dr Merkel is caught between the crisis and an increasingly impatient German public. She prays for an alternative but in reality it does not exist.
The market now seems to expect the imminent break-up of the euro. This is bound to happen but in the meantime we will see a continuation of half-measures which allow the euro to limp on for another few years.
The euro will die by a thousand cuts which no amount of sticking plasters can cover. The ultimate timing is uncertain, but the death of the great euro adventure seems, to me at least, inevitable.
Paul Gilfeather is the principal correspondent at Today.
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