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Druckversion - Time for Plan B_ How the Euro Became Europe's Greatest Threat - SPIEGEL ONLINE - News - International

Druckversion - Time for Plan B_ How the Euro Became Europe's Greatest Threat - SPIEGEL ONLINE - News - International

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Published by: josephsomers on Dec 29, 2011
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06/20/2011 05:42 PM
Time for Plan B
How the Euro Became Europe's Greatest Threat
The euro is becoming an ever greater threat to Europe's common future. The currency unionchains together economies that are simply incompatible. Politicians approve one bailout packageafter the other and, in doing so, have set down a dangerous path that could burden Europeansfor generations to come and set the EU back by decades.
In the past 14 months, politicians in the euro-zone nations have adopted one bailout package after the next,convening for hectic summit meetings, wrangling over lazy compromises and building up risks of giganticdimensions.For just as long, they have been avoiding an important conclusion, namely that things cannot continue thisway. The old euro no longer exists in its intended form, and the European Monetary Union isn't working. Weneed a Plan B.Instead, those in responsible positions are getting bogged down in crisis management, as they seek toplacate the public and sugarcoat the problems. They say that there is only a government debt crisis in a feweuro countries but no euro crisis, citing as evidence the fact that the value of the European common currencyhas remained relatively stable against other currencies like the dollar.But if it wasn't for the euro, Greece's debt crisis would be an isolated problem -- one that was tough for thecountry, but easy for Europe to bear. It is only because Greece is part of the euro zone that Athens' debts area problem for all of its partners -- and pose a threat to the common currency.If the rest of Europe abandons Greece, the crisis could spin out of control, spreading from one weakeuro-zone country to the next. Investors would have no guarantees that Europe would not withdraw itssupport from Portugal or Ireland, if push came to shove, and they would sell their government bonds. Theprices of these bonds would fall and risk premiums would go up. Then these countries would only be able todrum up fresh capital by paying high interest rates, which would only augment their existing budgetproblems. It's possible that they would no longer be able to raise any money at all, in which case they wouldbecome insolvent.But if the current situation continues, the monetary union will invariably turn into a transfer union, a path theinventors of the euro were determined to prevent.
Democratic Deficiencies
The euro's founding fathers did not anticipate such a crisis, and thus did not include any provisions for it in theEuropean Monetary Union's set of regulations. The euro welds together strong and weak countries, for betteror for worse. There is no emergency exit, and there are no rules to follow in an emergency -- only the hopethat everything will turn out well in the end. This is why the crises of a few euro countries are a crisis for theeuro, as well as a crisis for the European Union, its governments and its institutions. And this is why the eurocrisis has suddenly and expectedly mushroomed into a crisis for the political Project Europe, its future and itscohesion.The fact that the countries funding the bailouts are lacking democratic legitimization is now becoming thegreatest impediment to joint crisis management. Gone are the days of subtle debate over whether theEuropean Parliament involves citizens in a just and proportional way in the decisions reached by the EuropeanCouncil, the body headed by the leaders of the European Union member states, and European Commission,the EU's executive. When things get serious, as they are now, decisions will no longer be made in thesomewhat democratically legitimized EU bodies, but at the more or lesssecret meetingsof a handful of leaders.During the German chancellor's and the French president'squiet walks together, and at the behind-the-scenesmeetings of discrete central banks, policies are being made that are then handed to the parliaments torubber-stamp, even though hardly any of their members understand them.
ruckversion - Time for Plan B: How the Euro Became Europe's Greatest...http://www.spiegel.de/international/europe/0,1518,druck-769329,00.html1 of 107/12/2011 12:25 AM
The costly decisions that are ultimately reached by the luminaries of European solidarity don't just affect thecitizens of the ailing member states in an existential way; they must also fear for their social security, their jobs and their assets.The decisions of European politicians are just as troubling for citizens who live, like the Germans, on thesunny side of the union, and are worried that their country is running up debt that could remain on the booksinto a remotely distant future.One of the reasons that Europeans are so incensed at their respective governments is that they arenotinvolvedin the decision-making process. Another is that they inevitably perceive their political leaders asbeing motivated by alleged factual constraints and the requirements of the financial markets, without havingany plan of their own.The euro debt crisis has already swept aside two governments, in Ireland and Portugal, and the Spanish andGreek governments could soon follow. Things are also getting precarious for the government in Berlin, whereChancellor Angela Merkel could lose her parliamentary majority in upcoming votes on bailout measures.
Resistance to Austerity Measures
A crack now bisects the continent, running between those countries that need more and more money andthose that are expected to pay. With the Greeks frustrated over the Germans and the Germans over theGreeks, the Portuguese, the Spaniards and the Italians, the political peace project of European unitythreatens to end in a great economic dispute among the nations.In the debtor countries, there is growing resistance against the constant barrage of new austerity programs,while the people of the creditor countries are increasingly incensed over the billions in new aid. The"Outraged Citizens" are taking to the streets in Madrid and Athens while the "True Finns" gain strength in theparliament in Helsinki. Some 60 percent of Germans are opposed to a new aid package for Greece, and thereis at least as much resistance among the opposition and trade unions in Athens to the government's efforts torein in spending -- a precondition for additional loans.Last Wednesday, thousands of Greeks staged a general strike intended to block access to the parliamentbuilding, where the new austerity program was being debated. Prime Minister Georgios Papandreou'slimousine was showered with oranges, while rocks were thrown elsewhere. The police used tear gas toprotect the elected representatives from the people they represent.To secure payment of the next loan tranche under the European aid package, Papandreou intends to puttogether another austerity package worth more than €6.5 billion ($9.3 billion) by the end of the month. Theprotesters outside the parliament building, unwilling to accept the prime minister's course of action, shouted:"Thieves, traitors. What happened to our money?"How long will citizens in the weak euro countries -- Greece, Portugal, Ireland and Spain -- continue to acceptthe harsh reforms? And how long will voters in the creditor countries tolerate their own governments takingever-higher risks to rescue the euro?
Euro Has Become Greatest Threat to Continent's Future
Finland is a country that is often held up as a successful model for other European countries, but the successof the right-wing populist "True Finns," who captured 20 percent of the vote in April's parliamentary elections,came as a wakeup call to the political establishment in Brussels. As the skeptics gain ground throughout theEU,anti-European sentiments are growingin even the core countries of the union, like France and Germany.The euro, created with the aim of permanently uniting Europe, has become the greatest threat to thecontinent's future. A collapse of the monetary union would set Europe back by decades, dealing it a blow fromwhich it might never recover, especially with Europe's position already threatened by the fast-growing Asianeconomies. How is a fragmented Europe to prevail against this new competition?This is why Europe's politicians want to defend the euro at all costs, and why they are approving one bailoutpackage after the next. They are playing for time, hoping that the markets will settle down and the reformswill take hold.The business community is supporting their efforts, too. In a major advertising campaign scheduled to run inleading publications this week, top German business executives, including ThyssenKrupp Chairman Gerhard
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Cromme, Siemens CEO Peter Löscher and Daimler CEO Dieter Zetsche, promote the monetary union andinsist: "The euro is necessary." They argue that ailing member states must be assisted financially, and thatthe common currency is "absolutely worth this commitment."
The Euro Is a Fair-Weather Construct
But the causes of the euro crisis are more deep-seated than that. The monetary union is a fair-weatherconstruct, as a number of economists said from the beginning. American economist Milton Friedman, forexample, predicted that the euro would not survive its first major crisis, and later, in 2002, he added:"Euroland will collapse in five to 15 years."For these reasons, the euro crisis, as suddenly as it occurred, was expected. However, the warnings had beenignored and treated as a minor nuisance. More than anything, the euro was a political project. Its advocates,most notably then German Chancellor Helmut Kohl and then French President François Mitterrand, wanted topermanently unite the continent's core countries and embed Germany, which many neighboring countriesperceived as a threat following reunification, in the European community.Politicians hoped that as a result of the common currency, the underlying problem of the euro's design wouldresolve itself, namely that the member states would almost automatically settle in at the same pace of economic development.It was a deceptive hope. In fact, it was only interest rates that converged, now that the European CentralBank (ECB) was setting uniform rates for strong and weak members alike throughout the entire economiczone. As a result, a great deal of capital flowed to Spain and Ireland, where a real estate bubble developed,while the Greeks and the Portuguese were able to live shamelessly beyond their means. They imported morethan they exported and took on more new debt to pay for their consumption.This behavior continued unabated until the financial crisis put an end to it. Suddenly money was scarce. Thebubbles in Ireland and Spain burst, the economy in the euro zone collapsed, and the Greeks were forced toadmit that their debts were much higher than they had ever disclosed before -- and that they had falsifiedtheir numbers from the beginning and should, in fact, never have been allowed to join the monetary union inthe first place.
Has the Euro Pushed Europe
Since then, the monetary union has been on the brink of collapse. Far from growing together economically,Europe has in fact grown even further apart. As a result, the chances that the euro will survive in its currentform are slimmer than ever. Politicians who ignore the laws of economics cannot go unpunished in the longrun.If national currencies still existed, countries like Greece and Portugal could resort to a proven means of reducing their lack of competitiveness. They would simply have to devalue their drachma or their escudo, andthen the laws of supply and demand would see to it that the flow of commodities was diverted.The prices of Greek and Portuguese products would go down to make them more marketable abroad. At thesame time, money would be worth less in Athens or Lisbon, so that residents of those countries could affordto buy fewer imported goods. This would be beneficial for the trade balance. Exports would rise and so wouldthe foreign currency revenues, allowing the countries to service their debts more effectively. Not thegovernment but the markets would reduce economic imbalances.But in a monetary union, the exchange rate is no longer available as an adjustment valve. Instead, themember countries must regain their competitiveness in different ways, namely by imposing tough austeritymeasures and reducing wages and prices. In a monetary union, it is up to the governments to enforce whatthe exchange rate would do in a system of competing currencies.
Muddling Through
If this fails, the mountain of debt will continue to grow. In the end, a country with a large deficit has threeoptions. First, it can declare itself insolvent and, after restructuring its debt, attempt to rebuild its economy.Second, it can also withdraw from the monetary union and reintroduce its national currency. Third, it canconvince the creditor countries to keep issuing new loans, thereby providing it with permanent financing.For more than a year now, European governments have been trying out a fourth option: muddling through.
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