It’s been an unlucky week in Europe and one that might mark a turning point in the Eurozone’s laboured camaraderie. After claiming two prime ministers, forcing spending cuts, and pushing debt issuance costs to record highs, it’s amply clear the 17-member single currency experiment is under severe threat. European leaders, after months of kicking the can down the road, may finally be coming around to the smartest decision of the euro’s history — that it's time to shut the lab, or at least, prune parts of it.
For a start, the premise of a single monetary policy for a disparate group of nations with different rates of economic growth, consumption, employment, inflation and political will has always been a somewhat hard one to sustain. Even in the early days of the euro, its critics argued that there isn’t enough in the treaty to ensure that countries stick to the prescribed norms of economic policy to ensure a uniform monetary policy works.
Now, more than a decade later, the European countries that are in deep trouble have demonstrated the ill effects of getting ample money at low costs — rates that would otherwise have been hard to come by had they not be leaning on the largest, most robust economies in the Eurozone. The ensuing unlimited cheap borrowing led to reckless fiscal management and large asset bubbles, be that in the property market in Spain or Greek profligacy.
To be sure, because euro-member countries have little independence in setting interest rates, or the value of their currency, membership in the monetary union has destroyed the flexibility of countries to climb out of challenging economic situations. So Greece, Ireland and Portugal don’t have a deeply depreciated currency that would help them with their exports, manufacturing or tourism, even as the Berlin-Brussels-Paris nexus dictates the bulk of policy making.
At the same time, the rift in the Eurozone is getting wider and more public. The private dissent that was always talked of by officials in hushed tones after meetings in Brussels is now a noisy cat-fight. The countries that are budget surplus or have their finances in order are protesting the bailout of nations who strayed from fiscal prudence. Tiny Finland raised enough of a stink while the Greek rescue package was being worked out and France has set off alarm bells after talking of a two-speed Eurozone.
In effect, a polished sit-down is turning into a pot-luck dinner where the various guests are fighting not just about the inconsistent food but also about who should be at the table. Trouble is that’s not likely to change any time soon because the kind of structural changes needed, especially in countries such as Greece and Italy, need a political will that they will have difficulty garnering. Besides, despite a decade of huddling together, the European Union still doesn’t have the labour laws and uniform government policies that should be the backbone of the seamless monetary and economic block that was originally envisaged.
The markets have already sensed this and are ahead of the game. Italian bond yields crossed the 7 per cent mark this week. It’s an unholy number, a yield level that forced others such as Portugal, Ireland and Greece to seek bailouts. Italy, with a quarter of Eurozone public debt, is too large for that kind of cuddle.
To survive as a unit Eurozone’s only choice may be to restrict the union to a group of likeminded countries which stay the course on fiscal prudence. That, though, means a state burial for some. Just be prepared that it will be unbearably heavy- hearted.
Anjana Menon is a Delhi-based writer
