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Five Questions to Save the Euro

What is needed to tackle the euro crisis in full and regain the confidence of investors and markets?

September 20, 2012

What is needed to tackle the euro crisis in full and regain the confidence of investors and markets?

To answer any questions about the validity of the European Central Bank’s strategy requires an understanding of what the euro crisis really is — or has morphed into. What started out as a financing problem for Greek public debt has mutated several times. In fact, the term “euro crisis” has become a metaphor for several overlapping crises.

The first crisis concerns the matter of government debt at the national, regional and local levels. There is little denying that the (largely Western) age of public debt, which started with the oil shocks of the 1970s, is in its dying hours.

Whether we like it or not, whether we can even imagine it or not, the past legacy of ample debt will have to be shouldered and the debt addiction will have to be ended. That applies not just to Greece, but to European governments everywhere.

The second crisis concerns Europe’s economic potential, particularly in its Southern rim. Masked and doped by credit in previous years, the real challenge is that the region is structurally in poor economic shape, with little potential to dynamize its economies.

The third crisis is the future of the welfare states that Europe has so lavishly established over the past half-century. These now find themselves ever more squeezed just as the aging process of society truly begins to weigh in.

That leads to crisis number four: The European Union itself lacks the financial infrastructure to tackle its monetary crisis adequately and needs to invent one — all while the clock ticks.

Little wonder then, in light of all these challenges, that the euro crisis has become an existential political crisis for Europe. It requires a profound political response — which is crisis number five. The outcome of this crisis will determine the fate of the other four.

If we assess Europe’s assets in dealing with this (over)load of crises, we find that a central bank with a limited mandate is the only common institution. This means that European crisis management boils down to permanent conflict management between 17 different euro countries.

Diverging national interests sow deep mistrust between the European partners. We have all had our share of ethnic stereotyping, whether it was about lying Greeks, lazy Italians or imperial Germans.

The European machine that was invented to unite the European people is thus re-dividing them, along age-old fault lines. The euro that was supposed to hold the European project together is unraveling it from within.

And the currency that was supposed to offer the world a European alternative for the U.S. dollar is marginalizing Europe. Meanwhile, China and its renminbi are on the rise.

To be fair, the euro countries have already taken important decisions, including a common stability fund, debt restructuring for Greece and other countries, a collective pact for budgetary discipline, as well as the blueprint for a banking union that should offer European stability in case of a national banking crisis.

None of these steps would have been conceivable politically without the euro crisis, but none of them go far enough. The stability fund is insufficient in volume, the debt restructuring too limited, austerity too one-sided (and thus economically counterproductive in the short run). The banking union is more a long-term process than anything that promises to have an immediate impact.

Europe is constantly running behind the facts. At every turn, it does more, but it is always “too little, too late” because the crisis keeps getting bigger and more complex.

What, then, is needed to tackle the euro crisis in full and regain the confidence of investors and markets?

Europe simply has to solve each of its overlapping crises. These are not all entirely rooted into the euro, but the euro has tied them all together. Only by dealing with them comprehensively and simultaneously can clear up the sky over euro-land for good.

For us Europeans, this makes it necessary to answer several critically important questions:

Do we want to organize the mother of all debt restructurings and — inevitably — face up to yet another banking crisis?

Do we thereafter sustain rigid budget discipline to gradually cut down our remaining debt overhang — and forever be thriftier with the public purse?

Do we want to lift the entire eurozone to a sufficiently comparable level of economic development (i.e., a lengthy operation of economic reform and financial transfers from North to South)?

Do we want to purify social protection and adjust it to the fiscal, economic and demographic reality?

Do we want to trade summitry and bargaining for centralized European power on such crucial domains as budgetary policy, competitiveness and taxation?

If the answer to these five questions is yes, then the future of the euro is secure and the European political crisis will be turned into a great European leap forward.

But if any one of the questions proves unsolvable, then the euro is unsustainable in its current composition. Its reconfiguration should then become the primary political objective instead.

Salvaging the euro as we know it

Enormous doses of European solidarity and transfer of national sovereignty are therefore required to salvage the euro as we know it.

For the richer eurozone countries, this primarily means providing lots of money. For the poorer ones, it means lots of cutting and changing their ways. All are in for a great loss of autonomy.

The ECB, in and of itself, certainly does not provide an answer to any of the five crucial questions. Indeed, it cannot — because these are all political decisions, resting in the hands of governments.

The ECB’s recent move to provide direct financial support on the condition of a European-approved reform path can work as their catalyst.

Providing cash from the ECB’s coffers or printing presses is tantamount to European solidarity, without the wrenching choices that would be otherwise required in the stronger countries in order to make outright financial transfers.

Voluntary submission to European austerity or reform is tantamount to a loss of national sovereignty, without its formal transfer.

In short, the ECB presents itself as the shortcut for reaching the same goals by other means. Therein lies a core weakness: If the ECB’s plan works, it will bridge a certain crisis period. But this maneuver will postpone the final reconstruction of the euro and burden it with a new monetary legacy.

If the ECB’s maneuver fails, then the European debt problem will have a scary new dimension — and the ECB will have become a “bad bank.”

In the meantime, one cost is already obvious: The ECB has become a full-scale political actor that has suppressed the German Bundesbank for the time being. This will have implications, certainly in terms of public opinion in Germany.

And so the slow motion train crash, a.k.a. the euro crisis, continues. While the ECB has bought the politicians time (and money) for the umpteenth time, the beneficiary countries still have to submit to European control to gain program support. And they still have to achieve economic growth to appease the markets.

In other words, the crisis countries face exactly the same challenges as before, before the ECB stepped up to the plate. The only difference is that there is a bigger carrot at the end of the stick.

Whatever its final destination, the eurozone crisis will require much additional sacrifice and much additional money from all the citizens in all the member states. At stake is nothing less than the role of Europe for the Europeans and in the world.


The European machine that was invented to unite the European people is re-dividing them along age-old fault lines.

Europe has to solve each of its overlapping crises. Only by dealing with them comprehensively and simultaneously can the sky over euro-land clear up for good.

Europe's overlapping crises are not all entirely rooted into the euro, but the euro has tied them all together.

To save the euro, richer countries will have to provide lots of money. Poorer ones will need to cut their budgets. All are in for a great loss of autonomy.