The Truth for the Euro’s Existential Crisis

Greece-Europe

Hey euro! For a while there, you looked like a goner. During those debt crisis days in 2012 when Greece was imploding and Spain’s banks were teetering and the Germans were asking why they had to pick up the bill, there was a serious wobble. Common European currency? Remind us, please, what Europeans actually have in common. And now that Greece is on the brink again and economic growth in the countries sharing the euro is still sluggish, there’s a reminder of how many problems it caused. The question is being raised once more: Can the world’s most ambitious financial experiment survive?

Greeks voted against further austerity demanded by the country’s creditors in a July 5 referendum held after aid talks collapsed and the country imposed capital controls. While officially the Greeks were deciding whether to accept the pension cuts and tax increases demanded in return for an extension of its euro-area bailout, the ballot was seen by many as an in-out vote on the country’s place in the common currency. Euro-zone leaders will meet July 7 to decide what happens next. Although Greece represents just 1.8 percent of the output of the bloc, a Greek exit from the euro would discredit the insistence of political leaders that the common currency is irreversible. Separately from the crisis in Greece, countries like France and Italy have also pushed the European Union to relax budget rules or give them more leeway to boost spending to help sagging economies. The 19-nation currency bloc is forecast to expand just 1.5 percent in 2015, about half the pace of the U.S. Euro-zone unemployment has held close to a record 12 percent for three years, with just under a quarter of young workers unable to find a job. The slump has fueled a surge in support for anti-EU and anti-establishment political parties across the continent. The ECB cut a key interest rate below zero in June 2014 and began buying government bonds in March, which has helped growth recover somewhat. The prospect for more stimulus sent government bond yields in the euro zone (excluding Greece) to record lows in early 2015.

The EU was set up in 1958, as the continent’s leaders vowed to make another war between them all but impossible. The euro came 41 years later, when a group of 11 countries jettisoned marks, francs and lire and turned control of interest rates over to a new central bank. The common currency’s scale provided better access to world markets and exchange-rate stability. It did not, however, impose uniform financial discipline; to avoid surrendering national sovereignty, politicians largely sidestepped a unified approach to bank regulation and government spending. While there were some rules, they were flouted. The crisis that brought the euro to its knees came during the global rout in 2009, when Greece acknowledged its budget deficit would be twice as wide as forecast. Investors started dumping assets of the most indebted nations and borrowing costs soared. The shared euro made it impossible to devalue individual currencies of weaker countries, limiting options for recovery. Politicians lurched through bailouts for Greece, Ireland, Portugal and Cyprus plus a rescue of banks in Spain. The panic fueled fears of a euro breakup as fragile banks exposed the common currency’s flaws. The firestorm abated in July 2012, when ECB President Mario Draghi pledged to do “whatever it takes” to preserve the common currency.

Euro-area leaders say that even if Greece falls out of the euro area, the common currency will survive. New systems have been put in place to centralize bank supervision and build firewalls between troubled debtors and taxpayers. They still may not have gone far enough. Proposals for a deeper union — including more oversight of national budgets and

the pooling of debt — have not been realized and could sow the seeds for another crisis. The diverging fortunes among countries in the bloc highlights the challenge for the ECB, which is concerned adding stimulus could undermine efforts to make laggards rein in spending. Even though a potential Greek exit from the euro poses less systemic risk now than in 2012, no one quite knows what the consequences could be economically and politically. Existential doubts about the common currency remain.

Hey euro! For a while there, you looked like a goner. During those debt crisis days in 2012 when Greece was imploding and Spain’s banks were teetering and the Germans were asking why they had to pick up the bill, there was a serious wobble. Common European currency? Remind us, please, what Europeans actually have in common. And now that Greece is on the brink again and economic growth in the countries sharing the euro is still sluggish, there’s a reminder of how many problems it caused. The question is being raised once more: Can the world’s most ambitious financial experiment survive?

Greeks voted against further austerity demanded by the country’s creditors in a July 5 referendum held after aid talks collapsed and the country imposed capital controls. While officially the Greeks were deciding whether to accept the pension cuts and tax increases demanded in return for an extension of its euro-area bailout, the ballot was seen by many as an in-out vote on the country’s place in the common currency. Euro-zone leaders will meet July 7 to decide what happens next. Although Greece represents just 1.8 percent of the output of the bloc, a Greek exit from the euro would discredit the insistence of political leaders that the common currency is irreversible. Separately from the crisis in Greece, countries like France and Italy have also pushed the European Union to relax budget rules or give them more leeway to boost spending to help sagging economies. The 19-nation currency bloc is forecast to expand just 1.5 percent in 2015, about half the pace of the U.S. Euro-zone unemployment has held close to a record 12 percent for three years, with just under a quarter of young workers unable to find a job. The slump has fueled a surge in support for anti-EU and anti-establishment political parties across the continent. The ECB cut a key interest rate below zero in June 2014 and began buying government bonds record lows in early 2015.

The EU was set up in 1958, as the continent’s leaders vowed to make another war between them all but impossible. The euro came 41 years later, when a group of 11 countries jettisoned marks, francs and lire and turned control of interest rates over to a new central bank. The common currency’s scale provided better access to world markets and exchange-rate stability. It did not, however, impose uniform financial discipline; to avoid surrendering national sovereignty, politicians largely sidestepped a unified approach to bank regulation and government spending. While there were some rules, they were flouted. The crisis that brought the euro to its knees came during the global rout in 2009, when Greece acknowledged its budget deficit would be twice as wide as forecast. Investors started dumping assets of the most indebted nations and borrowing costs soared. The shared euro made it impossible to devalue individual currencies of weaker countries, limiting options for recovery. Politicians lurched through bailouts for Greece, Ireland, Portugal and Cyprus plus a rescue of banks in Spain. The panic fueled fears of a euro breakup as fragile banks exposed the common currency’s flaws. The firestorm abated in July 2012, when ECB President Mario Draghi pledged to do “whatever it takes” to preserve the common currency.

Euro-area leaders say that even if Greece falls out of the euro area, the common currency will survive. New systems have been put in place to centralize bank supervision and build firewalls between troubled debtors and taxpayers. They still may not have gone far enough. Proposals for a deeper union — including more oversight of national budgets and the pooling of debt — have not been realized and could sow the seeds for another crisis. The diverging fortunes among countries in the bloc highlights the challenge for the ECB, which is concerned adding stimulus could undermine efforts to make laggards rein in spending. Even though a potential Greek exit from the euro poses less systemic risk now than in 2012, no one quite knows what the consequences could be economically and politically. Existential doubts about the common currency remain.