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Euro's future at stake in Greek's grave economic crisis

By Joschka Fischer | March 4, 2010, Thursday | Print Edition

"IT'S when the tide goes out that you find out who has been swimming naked," the legendary investor Warren Buffet aptly remarked when the global economic crisis hit.

This is as true for countries as it is for companies. Following Ireland, Greece is now the second euro-zone member to have gotten into massive payment difficulties due to the crisis.

Ireland was able to resolve its problems by itself, through a restructuring policy that was painful yet unflinching. It could do so because its economy, apart from its excessive debt burden following the collapse of an asset bubble, was basically sound.

The situation in Greece is different. A restructuring of the economy will be much more difficult, because it will have to be more far-reaching. The fiscal deficit resulted not just from internal financial imbalances, but also from a system that for too long time has been in denial of reality, allowing the country to live beyond its means.

Nevertheless, the European Union can neither allow Greece to slide into national bankruptcy nor hand it over to the International Monetary Fund, since other euro-zone members - namely, Portugal, Spain, and Italy - would probably be next in line to be attacked by the markets.

Budget deficits

In that case, the euro would be in danger of failing, for the first time seriously imperiling the entire project of European integration. The real problem at the heart of the Greek crisis is so grave because it involves the fundamental weakness of the euro: its lack of support by a government policy.

The caps on member states' budget deficits and public debt imposed by the Maastricht criteria have proven relatively early on to be of limited use in the real world, and the same is true for the monitoring tools linked to these limits.

In any case, the Maastricht rules were never designed for a perfect storm like the one triggered by the collapse of Lehman Brothers in September 2008. The euro, which turned out to be the critical tool for defending European interests in this crisis, will now be subjected to an endurance test directed at the soft political heart of its construction.

Europe's leaders - first and foremost Germany and France, which will play the deciding role - must act quickly and put through new, imaginative solutions.

The solutions that Europe's leaders provide must go beyond Maastricht, but without triggering new institutional debates, which would lead us nowhere.

Moreover, new instruments like Eurobonds will have to be made available in order to reduce the affected euro-zone countries' interest burden, provided that they have taken serious steps - subject to effective control mechanisms - toward credible restructuring.

The current crisis has, however, also shown that the Council of Finance Ministers (Ecofin) is unable to assert such control over EU member states' fiscal policies. The direct leadership of heads of state and government is needed, at least in these times of extreme crisis.

Sign of hope

One sign of hope is that, following the recent Franco-German summit, German Chancellor Angela Merkel for the first time did not publicly oppose the idea of a European economic government.

Spelling out such a body's structure, costs, decision-making procedures, and control mechanisms as quickly as possible is now the order of the day. Indeed, there is no time to lose.

But even with one, two, or three steps forward, the German and French governments will be taking great political risks domestically if the euro crisis in the Mediterranean worsens and a financial bailout there becomes necessary to save the common currency.

The populations in the countries that will have to foot the bill are unprepared for the reality check ahead of them, adding fuel to a years-long growth in Euro-skepticism.

Pay for the southern European countries or resign oneself to the end of the euro? The question makes clear what this crisis is about: the future of the European project.

(The author, a leading member of Germany's Green Party, was Germany's foreign minister and vice chancellor from 1998 to 2005. The views are his own. Copyright: Project Syndicate/Institute of Human Sciences, 2010. www.project-syndicate.org.)

Foreign Views


 

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