Citizens of Germany, Greece and Ireland are all learning an important lesson: When you share a lifeboat with someone, you can’t each go your own way.
Germany is the biggest contributor to the $113 billion bailout that the European Central Bank and the International Monetary Fund cobbled together for Ireland last weekend. The seven-year package of loans, totaling 85 billion euros at an average interest rate of 5.8 per cent, guarantees that Irish citizens will face years of financial austerity, as do Greek citizens following their own bailout earlier this year. As Europe’s largest economy and the dominant financial player in the euro zone, Germany was the keystone of the Greek aid package as well.
The Irish and the Greeks are not happy about the benefit cuts, tax increases and public-sector pink slips that they face. Protesters in both countries have been in the streets bemoaning the loss of their countries’ financial self-determination. Given their historic struggles for sovereignty, anything that smacks of foreign domination hits a nerve. Greece and Ireland both treasure their perceived independence.
Ironically, the German public is voicing more or less the same complaint. Germans, who have kept their own financial house in order, wonder why they should be on the hook for the policy errors and profligate spending of their fellow Europeans.
The answer is simple. Like it or not, all 16 countries that use the euro forfeited a lot of their independence when they agreed to use a common currency. This year’s market turbulence is forcing those countries to acknowledge reality.
Germans may not want to be responsible for Greek and Irish debts – or for those of Portugal and Spain, both of which are potential bailout candidates – but the Germans have been major beneficiaries of the common currency. Led by its exports, including exports to the weaker nations in the euro zone, Germany’s economy is set to grow by well over 3 per cent this year, making it one of the leaders among the industrialized nations. The euro’s relative strength gives the countries that use it more power to purchase German goods.
Membership in the euro zone, and in the larger European Union, gave weaker economies such as Greece and Portugal the opportunity to tap world credit markets for the past decade at much lower interest rates than those countries could have obtained on their own. Had the borrowed money been invested productively, those economies might not now be straining to repay it. But much of it went to sustain government budget deficits that, in turn, supported social benefits that those nations could not afford. Though citizens may now balk at the austerity they believe is being imposed on them from without, the cutbacks are returning spending to levels that those economies can realistically sustain.
The struggling euro nations arrived at more or less the same economic mess via very different routes. Greece lied about its spending to hide its lack of fiscal discipline. Ireland built a banking system far larger than a country of just 5 million people needed, and when those banks teetered on the brink of collapse, the government made an ill-considered promise to support them no matter what. Portugal failed to adapt to global economic competition and used its access to cheap credit to mask its problems. Spain got caught up in a real estate development boom that was at least as bad as what happened in the United States.
They all share the euro lifeboat with Germany and the smaller northern European nations, like the Netherlands, that have managed their financial affairs much more conservatively. Other passengers include Italy, which may eventually prove to be a larger version of Portugal, and France, which is an amalgam of the various European strengths and weaknesses.
All of these countries think of themselves as sovereigns, but theirs is a kind of limited sovereignty that the world has never seen before. The European Union is, after all, founded on the idea that the traits that unite its member nations, such as their commitment to democracy, outweigh the traits such as language and culture that divide them. The euro currency takes that concept to a new level, one in which the economic travails of one nation immediately become the problem of its neighbours.
The euro crisis is making one thing perfectly clear: Either the member nations will sacrifice their freedom of independent action and hang together to save their common currency, or the euro is going to be a relatively short-lived experiment that will be remembered as, at best, an idea that was ahead of its time.
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