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The sovereign debt crisis has cast doubt over the future of the European project.
WASHINGTON — In 1992 George Soros sold short more than 10 billion pound sterling. He bet that the British government would devalue its currency and withdraw the pound from the European Exchange Rate Mechanism (ERM), the precursor to the euro. By locking exchange rates within certain ranges, the ERM helped provide stability across European markets.
It was doomed to fail. Since the European countries' individual economies could diverge, their leaders had a hard time staying committed to the ERM. Financial markets knew this. After Soros' move, the pound left the ERM and Soros became the “man who broke the Bank of England.”
In recent months Europe’s common currency regime has again been cast into doubt, as some eurozone countries have run into serious fiscal problems, particularly Greece but also Spain and Portugal. Speculators have been betting against the survival of the euro. A Greek exit from the euro no doubt crossed their minds. Governments have once again entered the fray to battle the markets as a wider European sovereign debt crisis has emerged. After a 110 billion euro bailout for Greece failed to cool markets, the European Union and International Monetary Fund announced an enormous 750 billion euro plan to be made available to all 16 eurozone members. Despite initial euphoria by financial markets, a new cloud of uncertainty now hangs over the future of the European project.
What brought Europe to this point? The euro has provided a stable unit of currency helping facilitate trade, investment, and growth. As an emblem of European solidarity, it remains a major milestone in the history of the European project, which has expanded peace and prosperity in Europe and to its neighbors since the end of World War II. Yet, embedded in this European narrative has been the assumption that poorer members will rise to the level of the wealthier ones. This aspiration has not been fulfilled.
After adopting the euro, policymakers gained a reliable unit of exchange, but could no longer devalue their currency in times of trouble. Instead, eurozone countries were expected to reform their labor and product markets, making them more flexible, and trim excessive public sectors. As markets become more competitive, integrated and productive, economic growth would expand the pie pulling up the poorest members. EU Treaties established sanctions against eurozone countries that did not live within their means (i.e. ran excessive deficits). The European Central Bank’s mandate to ensure price stability helped to anchor monetary policy.