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Letter from London: Why the euro has made it this far

The single currency’s collapse was widely predicted a year ago. But it’s still here — and Greece is still a member. Understanding why requires taking a longer view.

Euro symbol 10 31 2012Enlarge
Still here. (Johannes Eisele/AFP/Getty Images)

LONDON, UK — How far back does your historical memory go? May I ask you to cast your mind back exactly one year? Not too far a stretch, I hope.

The main story grabbing the headlines back then was: The Euro Zone Crisis!!!

The euro was on life support. The single currency was being given its last rites. It was about to crumble if euro zone governments and the central bank failed to unleash a trillion euro "bazooka." No, said the economist Nouriel Roubini, make that a 2 trillion euro bazooka.

The ratings agencies — Oh My Gawd!!! One country's bonds after another were being downgraded.

Greece was going to be forced out. No, Germany was going to quit and return to the deutschmark and leave the others to stew in their profligacy.

Then an EU summit in Brussels struck a deal between Greece and its bondholders. Hooray!

It buoyed hopes for two entire days before unraveling, taking Europe back to the brink and effectively sounding the end of the single currency — or so we journalists were told, and we in turn told you.

How many billions were lost shorting the euro at that point is a question hedge funds, big banks and financial betting sites aren’t being asked and probably wouldn't answer. But let's hazard a guess: a helluva lot.

Because here we are, one year on. The euro still exists. Greece is still part of it and so is Germany. How did that happen? There’s been no miracle transformation in euro zone members’ economies. Indeed, many are in even worse shape than they were a year ago. Yet the 17-member single currency is hanging together. Heck, the euro zone countries' cumulative deficit has even shrunk.

How did the English-speaking world's finest reporters, editors, financial commentators and bond-market makers get things so wrong?

First, a look at the atmosphere in which the crisis exploded. To begin with, there’s a prejudice against the euro in the Anglo-American world. You can get fancy explaining why by talking about the skeptical and empirical traditions undergirding our kind of capitalism versus the more romantic, speculative intellectual tradition that gave birth to the continental version.

Or you can dispense with the pseudery and just join me in alleging that many, many people in the financial industry and its attendant stenographers in the press are Thatcher and Reagan children who regard the euro as an attempt to bring socialism to Europe through the back door.

Whichever way you go, the atmosphere became fevered even before matters began getting out of hand. The foreign exchange guru John Taylor confidently predicted the euro’s break-up at the start of the year during a Reuters international investment summit.

Similar pronouncements lurked in various corners of the internet, where people go for "information." David Anderson, an international tax and property lawyer at the London law firm Sykes Anderson, posted an interview with himself advising clients in troubled euro zone countries to get their money out because there was every probability the euro would collapse during the course of 2011.

Then there were George Soros and other big beasts commanding the op-ed pages of the Financial Times, The New York Times and The Daily Telegraph. Soros said in June last year that "we are on the edge of collapse and that is the time to recognize the need for change."

So what changed?

First of all, the players. A year ago, the crisis was focused on Italy and Spain, whose prime ministers were soon replaced by new leaders willing to make the cuts to ballooning deficits their countries’ bondholders were demanding.

The most important personnel change, however, was the arrival of Italian Mario Draghi as President of the European Central Bank.

Confidence is elusive in financial crises. But the bond markets’ big players clearly decided governance in the euro zone had improved massively thanks to the arrival of those three men.

Draghi in particular figured out clever ways to work within the ECB's limited remit to make clear that the bank would stand behind its members’ bond obligations.

The bond markets simmered down. The waves of panic smoothed out and the distance between less frequent peaks and troughs became smaller.

There was another panic in July of this year. Do you even remember? We in Britain hardly noticed because the Olympics were coming up.

I asked Ambrose Evans-Pritchard, international business editor of The Daily Telegraph and the thinking euro-skeptic's go-to analyst, why he thought the euro had made it this far.

He noted that Europe's political leaders are constantly being told, "Unless they do 'something,' the thing will fall apart. So they have a summit and they do 'something' and it holds for about 90 days and they have to do something else."

How is Greece still part of the single currency? AEP (as his many readers refer to him) makes this important point: The euro crisis isn’t just about finances. It’s also about geopolitics. A Greek exit from the euro zone would create volatility in a region that’s volatile enough at the moment.

Greece is in NATO and so is its neighbor Turkey. Turkey is increasingly embroiled in a conflict with Syria. Changing Greece's relations with the EU might threaten the NATO balance as well.

Let me underline Evans-Pritchard's point: the euro crisis was never just about the finances — that's where the press, the gurus, and the "players" got it wrong. The euro is as much about the politics of the European project as it is about the bond ratings of the euro zone’s southern countries. When their sovereign debt came under attack, the EU’s clunky political machinery rattled into action. The least that could be done to save the currency was accomplished; when the crisis fired up again, EU leaders did the least they could do again and moved on.

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If the Cassandras of a year ago had looked at the EU’s history, they would have known that’s how the EU has always worked — and perhaps there would have been less panic.

Anyway, let me quote the pre-eminent historian of Europe, Norman Davies. He told the Financial Times last week that "10 or 15 years ago, I said that Europe would need a really serious crisis for things to be put on the right track. I don’t know how bad it’s got to get before people are driven into changing things.”

"I suspect that things will deteriorate,” he added, “and then some sort of solution will be thought of, and then the European momentum will begin to grow again — after a crisis of several years.”

Next time you read another spasm of euro doom, consider who wrote the words and what tradition they represent, then remember the professor's analysis. The European project is a long game. Analysis is best left to historians whose frame of reference is centuries rather than folks who trust algorithms whose frames of reference are nanoseconds.

http://www.globalpost.com/dispatch/news/regions/europe/121031/euro-crisis-zone-ecb