The single currency’s true fatal flaw

Written on September 20, 2011 by Ángeles Figueroa-Alcorta in Europe, Globalization & International Trade, Political Economy

By Gideon Rachman

If you want to understand why the euro is in such trouble forget, for a moment, debt and sovereign bonds – and take a look at the bank notes. The images on euro notes are of imaginary buildings. While national currencies typically feature real people and places – George Washington on the dollar bill, the Bolshoi theatre on the Russian rouble – European identity is too fragile for that. Selecting a place or a hero associated with one country would have been too controversial. So the European authorities chose vague images that represented everywhere and nowhere.

Now, a decade after euro notes first emerged from cash machines across the continent, this lack of a common identity is the fatal flaw that may sink the common currency.

Over the weekend Tim Geithner, the US Treasury secretary, displayed palpable impatience with what the Americans see as a lack of political leadership in Europe. But the problem that is bedevilling the currency is not ultimately to do with leadership. It is more fundamental than that. The fact that national loyalties are much stronger than any common European loyalty means leaders are constrained in the solutions they can feasibly consider.

In most European Union countries, including Germany, the euro was introduced without securing the direct assent of voters. It was assumed that voters would learn to love their new currency, when they saw that it led to a more prosperous and powerful Europe. But now that the single currency is instead associated with pain, austerity and debt, the limits to European solidarity are clear.

So when Angela Merkel, the German chancellor, rules out “eurobonds” (debt issues backed by all nations using the euro), she is not being unimaginative or miserly. She simply knows German voters will never accept underwriting the debts of southern Europe on a permanent basis. The voters of Finland and the Netherlands – the other northern European creditor nations – are more hardline than the Germans in their rejection of this notion. Meanwhile, anger against the flinty and self-righteous northern Europeans is mounting in austerity-hit nations such as Greece, Portugal, Spain and Italy. Read more…

As published in www.ft.com on September 19, 2011.


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