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History of European integration explains why single currency is in current troubled state.
Editor's note: European leaders meeting in Brussels today agreed to create a permanent support fund for the euro, a first step — they hope — in calming market jitters over the plight of Europe's single currency.
LONDON, United Kingdom — This is the story of the euro and the economic crisis overwhelming the periphery of the eurozone — the main subject of a European Union summit meeting today and tomorrow. Before you click away to a story with more sex appeal, answer two questions:
How many people were killed in the wars that convulsed Europe between 1914 and 1945?
Between 1871 and 1945 France and Germany went to war three times, how many times have they gone to war since?
You are thinking about the answer to the first, but know the answer to the second: None. Zero. Zip. The story of the euro and its current crisis begins with that fact.
The idea of what is today the European Union can be traced to those 70 years of war and uneasy peace between Germany and France. Out of the rubble of that era two visionary politicians, Frenchman Jean Monnet and German Konrad Adenauer — in 1950, just five years after Germany's occupation of France was ended — established the European Coal and Steel Community (ECSC) to make it easier for France to import German steel and coal.
The ECSC was a success and by the end of the 1950s the Common Market was created. Decade by decade, treaty by treaty, Europe's political leadership continued their countries' drive toward economic integration. By 1985, the Schengen agreement eliminated many border controls, allowing the free movement of goods around the EU. Europe's collective economies grew.
The logic of economic integration led inevitably to the creation of a single currency. The Maastricht Treaty, signed in 1992, set the EU on the path toward the euro, launched in 1999 and used today by 16 of the EU's 27 members.
The logic for having a single currency may have been impeccable, but implementing it meant putting the idea through that most illogical of processes — politics. Politics is about appealing to emotion and the call of national identity is about as emotional as it gets.
In order to avoid running into the raw emotion connected to the EU's economic integration, much of the process was delegated to the European Commission, the EU's administrative arm in Brussels. Staffed by technocrats who speak and write a language unknown to ordinary folk, the process by which the euro was created was opaque and to some minds not entirely democratic.
For some nations, such as Britain, giving up the national currency was an identity crisis too far. Led by the right wing of the Conservative Party, opposition to joining the euro is visceral and deep seated in the U.K., and no British prime minister, Conservative or Labour, has even attempted to argue for membership in the single currency.
France and Germany were willing to cede their national currencies, but not their authority. Politicians like to control tax rates. They like to set budgets. So these functions were reserved for each government's politicians to oversee.
For its first decade the euro worked well. It quickly established itself as a reserve currency. It was instrumental in helping the entire European Union grow economically. Today the EU accounts for between 27 percent and 28 percent of world GDP — a larger share than either the U.S. or China.
But now there is a crisis. The onset of the global economic downturn caught over-leveraged economies in Europe with their pants down, especially those that, like America's economy, were heavily dependent on a never-ending property boom to maintain prosperity: Ireland, Greece, Portugal and Spain. Riots erupted again in Greece on Wednesday, thousands of young Irish people are re-enacting the great emigration of earlier generations, and Moody's investment service warned it is reviewing Spain's economy with an eye to downgrading its bond rating.
Current economic conditions have exposed the crack in the EU's foundation. A single currency always implied greater political union and that has never happened. There is no federal European government, and so there is no way for the EU to set a central tax policy or budget. Each nation inside the euro is sovereign with its own political dynamics. It is an irony that a politically created project has no overall political framework.
Now the smaller nations on Europe's periphery are in deep trouble, and they are having to raise money to pay off debts. The summit today and Friday is supposed to come up with a coordinated solution, but that won't be easy.