Delusions of Sovereignty

The Great Euro Crisis of 2011 looms large.  Gaping sovereign debts have led investors to doubt the ability of several European countries – from Greece to Italy to even France – to pay back their debts.  Interest rates have shot up across the Eurozone, adding fire to the flame of Europe’s burning fiscal houses.  An already tepid global economic recovery has begun to hit the wall.  As a result, several prominent economists, including Paul Krugman and Nouriel Roubini, have declared imminent the breakup of the Euro, an event that would wreak chaos in the financial markets, destabilize the European continent, and leave the world economy in a worse state than after the fall of Lehman Brothers in 2008.
The threat is great, the stakes are high, and European leaders have very little time left to make the drastic moves necessary to prevent crisis.  And yet, while dire, today’s crisis was not completely unexpected.  Economists questioned the viability of a common European currency since its inception in the late nineties, worrying that a monetary union without accompanying fiscal integration among disparate economies was a recipe for disaster.  Krugman’s piece from January lays out these concerns.
And while Europeans limited such integration at the Eurozone’s conception in an effort to protect their sovereignty and economic self-determination, the fates of today’s Eurozone economies are inextricably linked through their exposure to the impending crisis.  Indeed, despite what leaders like German Chancellor Angela Merkel seem to believe, every Eurozone country will have to sacrifice if any wishes for this currency experiment to continue.
The fact that bond yields on Greek and Italian debt are soaring comes as no surprise; these countries have amassed huge public debts through inefficiency and profligacy subsidized by years of low rates that overestimated their competitiveness and financial soundness – call it investor Europhilia.  But on Thanksgiving Day, Germany’s bonds, considered among the safest in the EU, sold at precariously high rates.  Yields on sovereign debt from Finland and Norway, countries with sound finances, have also risen.  Europhobia is on the rise.  This should serve as a warning sign that investors – as well as banks – are preparing for crisis, and no Eurozone country is immune.
Yet Merkel remains reluctant to take the necessary steps to avert the crisis.  While she appears in recent days to be warming up to the issuance of new Eurobonds, she insists that peripheral countries adopt stringent austerity measures first.  At the same time, she refuses to consider treaty changes that would give greater power to the European Central Bank to raise rates, buy more sovereign debts, and thus ease the immense hardship these austerity measures will inflict in the short run.  In essence, she insists that the peripheral economies bear the entire burden of the crisis in a ploy of self-interested populism thinly veiled in overzealous inflation-hawkery.
Many argue that the Greek and Italians should shoulder much of the blame for the current crisis given their years of irresponsibility.  But, as Roubini has pointed out, unilateral devaluation by the periphery has no chance of success.  The recently proposed amendments to the Eurozone treaty that force greater budget austerity are a necessary long-term move, but they are not sufficient to stem the crisis now and will likely only serve to further depress the periphery’s economies and increase debt levels.  Perhaps there is an argument to be made that Greece should not have joined the Eurozone to begin with.  But they did, and the monetary union is formed.  And yet leaders like Merkel continue to hold on to the ignorant belief that Greek’s woes can be isolated, that monetary union means nothing more than Greeks and Germans holding the same bills in their wallets.
What does a shared currency really mean?  Just take out your US dollar.  Inscribed on every piece of currency floating around our union is the phrase, “In God We Trust.”  In reality, it means, “In One Another We Trust.”  We have valued all our worldly possessions in terms of bills that carry significance only because we believe they should.  By sharing a currency, New York and Nevada – economies with far different levels of competitiveness and productivity – have consigned to bailing each other out through a common monetary and fiscal structure because they share a national consciousness and trust that the other will not heavily endanger its own prosperity.  Unemployment is markedly higher in Michigan than it is in Massachusetts, for example, and yet Americans are willing to jointly take a devaluation of their currency or pay for stimulus funds to put proportionally more Michigan workers back to work.  America’s fiscal integration, which makes its monetary union function, emerged not as a deliberate tool for monetary stability (though it is necessary), but rather as a result of national trust and common interest that solidifies our union.
This trust is what the Eurozone is missing.  Greeks continue to rail against measures they see as foreign impositions on their national sovereignty.  Germans resent any moves that would leave them more on the hook for the periphery’s sins.  Yet, as this crisis has shown, Europeans have to some extent already tied themselves to each other’s economic fates for better or for worse by joining in monetary union.
The upcoming events in this crisis will show us to what degree Europeans have developed a common trust, a true, functioning European identity.  If they have, and leaders like Merkel agree to new Eurobonds, expanding the ECB’s powers, and risking moderate inflation and devaluation of the Euro in shared sacrifice to address a shared issue, the Eurozone has hope for survival.  But I fear the opposite: that Europeans will become increasingly polarized and divide along national identities that may predominate despite lingering dreams of pan-Europeanism.  And paradoxically, in search of greater autonomy, these nations will throw themselves into collective misery.
Indeed, the choice today is not between a less integrated and a more integrated Eurozone.  The choice is between an effectively integrated Eurozone or none at all.
Photo Credit: The Telegraph