The euro has lost its innocence

Meeting is such sweet sorrow.
Meeting is such sweet sorrow.
Image: Reuters/Philippe Wojazer
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The founding fathers of the euro viewed its creation as a vehicle for European unity and cooperation. They thought it would cement an ever-increasing integration of European economies, and would push European countries towards political union. Some even viewed the common currency as a way of ensuring peace on the continent.

As recently as 2009, European policy makers still largely believed this rosy ideal. In a speech that year celebrating the euro’s 10th birthday, the top economic official of the European Union, Joaquin Almunia, captured the spirit of the moment:

“Ten years on, it is a historic achievement of which all Europeans can be proud. Not only is such a currency union unprecedented in history; we can declare it a resounding success. Within the space of a decade it has clearly become the second most important currency in the world; it has brought economic stability; it has promoted economic and financial integration, and generated trade and growth among its members; and its framework for sound and sustainable public finances helps ensure that future generations can continue to benefit from the social systems that Europe is justly famous for.”

Then came the euro crisis. Years of intense market instability were followed by several more years of economic underperformance. The eurozone’s constituent economies and financial markets also continued to diverge.

Nevertheless, for those with a practically religious belief in the euro, any talk of a breakup was regarded as taboo. Back in 2010 and 2011, then president of the European Central Bank, Jean-Claude Trichet, was repeatedly asked by journalists about his thoughts on the risk of a euro breakup. But he simply refused to comment, saying that the idea was ‘an absurd fantasy.’

How things have changed. This weekend’s meetings in Brussels were essentially about whether Greece should stay in the eurozone or not.

One of the draft statements by eurozone finance ministers (never actually published, but widely reported in the press) ended with the following very explicit paragraph:

“In case no agreement could be reached, Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring.”

The situation in Greece this year has forced European policy makers to openly debate the issue of a potential Greek exit from the common currency. So much for fantasy.

Six months after the left-wing SYRIZA party won the Greek election, negotiations between Greece and its official sector creditors (mostly the other eurozone countries) have still not come to a final conclusion, and the environment in which negotiations have been conducted has become increasingly hostile.

Policy makers from a long list of countries came close to losing patience with Greece before finally striking a tentative deal last night.

German Chancellor Angela Merkel put it this way: “The most important currency has been lost and that is trust.” Meanwhile, the Finnish government had been more explicit, stating that it was simply against providing more funding for Greece, which would have only hastened its exit from the currency union.

Banks have now been closed in Greece for two weeks, and ATMs are set to run entirely out of cash in coming days. Now Greeks will have to accept the terms of the deal. The situation was soon to become untenable; even now the Greeks are far from out of the woods.

A Greek exit from the euro would not have implied total disintegration of the euro. In fact, financial markets have been relatively stable in the face of all the bad news from Greece in the last several weeks. This suggests a degree of resilience, and that the euro will live on in some form, even if Greece departs.

But the idea of ever-increasing European integration is surely in question. Many policy makers are re-assessing their previous belief in the euro as a positive catalyst for European cooperation. Economic performance in the eurozone has been a disaster since 2008. Two costly bailouts for Greece have ended in a fiasco and an ugly political confrontation with the new Greek government. Meanwhile, anti-European parties are on the rise in many countries, including Italy, Spain and France (not to mention the United Kingdom is considering whether it should leave the European Union).

This weekend’s high-level meetings in Brussels were officially about Greece (and Greece seems like it will secure its third bailout and stay in the eurozone, as long as it quickly implements the long list of reforms it has agreed to). But the chaotic negotiations also told us something about the rest of the eurozone: Germany and France are no longer on the same page. French officials supported the Greek team, and even helped prepare the Greek negotiating proposal. Meanwhile, Germany seemed to prepare actively for a Greek exit. This split between the two main powers at the core of Europe could have major implications for the future of the euro.

Whether Greece exits from the eurozone or not remains to be determined. But the idea of European unity and ever-increasing integration is fundamentally in question. The euro may live on (in some form) for generations. But Europe’s common currency has lost its innocence.