Sol Sanders Archive

EU anxiety over the Euro, heartburn over Germany

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With 20/20 hindsight, the idea of a common currency was always dubious with virtually no coordination — save for the admonitions of Brussels' unelected commissioners — among member states, each pursuing its own economic strategy.

In fact, the euro remains a symbol of the top-down effort to end once and for all the West's civil wars by creating a united Europe. In a world, not just a continent, now being tested by the worst economic reversals in nearly a century, it was unavoidable that the euro would be damaged, putting the whole unification effort in jeopardy.

That hasn't happened yet. But as deficit-plagued euro countries jerk their belts tighter and the market for German exports narrows, an immovable object may be meeting what has long been an irresistible force. Locked into the single currency, strapped governments such as Greece and Portugal cannot resort to the old tried-and-true method of devaluing their currency to force readjustment by limiting imports and increasing exports. Some commentators who style themselves realists argue against going to the European Financial Stability Facility, announced in May at the height of panic over the eurozone's debts. Indeed, the facility's $550 billion might prove inadequate in a borrowing stampede. Rather, they say, the debtors should abandon "good European pretenses" — and bolt.

Last week was particularly nerve-racking:

The euro was dropping against other currencies, several representing economies that had their own severe troubles. There was 1.5 percent drop against the yen, a 1.2 percent decline against the British pound. The record low against the Swiss franc temporarily outpaced the gold boom. The euro also dropped 1.5 percent to $1.2699 against the dollar, even as the Obama administration was calling for new stimulative spending for the U.S. economy.

The euro's weakness was creating financial riptides. Investors questioned whether cutbacks in Ireland, Greece, Spain and Portugal — taken to reassure bondholders — would trap those economies in a downward spiral. Indeed, the Greek economy shrank 1.8 percent in the second quarter of 2010. But the cuts also introduced the possibility of violence from entrenched public-sector unions across the continent. In France, President Nicolas Sarkozy was already retreating — and may be backing off on even his modest suggestion that French workers might retire at 62 instead of 60. In any case, Mr. Sarkozy's "reforms" would only temporarily plug a deficit in compulsory universal pension plans, projected at $53.9 billion a year by 2018, and even with his fixes, the deficits would start up again in 2020.

But it was to Germany that one had to look for the heart of the matter. After all, it was the bearhug embrace of the postwar giants, French President Charles deGaulle and German Chancellor Konrad Adenauer, which was the essence of "the European project." Germany was to be the powerhouse for post-World War II Europe, but with its energies directed into building a commonwealth rather than military adventurism.

But the news out of Germany, too, has turned sour. German exports, 60 percent of which go to other EU members, plunged after sparking a chorus of optimistic hosannas with a strong three-month spurt. And German banks, entangled in the financing of subsidized exports, would have to ask for $133.5 billion in additional capital. In part, of course, this was a result of their picking up too many bonds of eroding value from Greece and other shaky issuers.

Ireland has already spent well over 20 percent of a year's gross domestic product rescuing its banks, which had taken Europe's wildest ride. But the Irish find refinancing getting dramatically more expensive. The fact that Ireland has just paid an interest rate almost twice as much as the going rate for Germany was another sign the euro project was out of whack.

The political implications were obvious. Berlin's critics — led by France, of course — say Germany's exports, cost controls and high savings rate are achieved by denying competitors the benefit of stronger German domestic consumer demand. That's a stronger argument with the formerly booming economies of southern Europe and Ireland now facing, at best, years of low growth. But German taxpayers have responded with demands for tighter screws on "wastrel" southern Europeans — overlooking the role Germany's own export-driven policymakers played in weakening earlier efforts to enforce debt limits for EU governments.

There were also signs that, for all the sackcloth and ashes Berlin wears for its Nazi past, the Germans were exploiting their neighbors. Rather than push a common energy strategy — the eurozone's greatest long-term Achilles' heel — Berlin has instead added insult to injury. Collaborating with Russia, it is laying a gas pipeline under the Baltic Sea, skirting Poland and the Baltic states to avoid transit fees, and then sabotaging Warsaw's efforts at importing natural gas from other suppliers to escape dependence on Moscow.

The message seems to be that Germany will now be an increasingly difficult partner. And we all find ourselves dealing with a muscle-bound German preponderance that the EU and the euro were supposed to subsume.