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Debt crisis exposes the euro's flaws but divorce is not an option

Like marriage partners, eurozone nations fight about money. Germany grumbles about paying for the profligacy of others, but pays, since sticking together is the lesser of evils, says Die Zeit's Josef Joffe.

euro notes tied together with measuring tape

The ties that bind the eurozone nations are wearing thin

The euro is, above all, a political currency that owes its existence to a compromise forged after the 1989 fall of the Berlin Wall. Then-Chancellor Helmut Kohl gave up his country's deutschmark, the emblem of German identity and postwar stability, to appease France and other neighbours anxious about the resurgence of a mighty, unified state at the geographical heart of Europe. The idea was to tie an enlarged Germany down to a "softer" currency shared by all Europeans. But Kohl made sure the euro was modelled on the strong D-mark. The low inflation and low deficit fiscal criteria spelled out in the 1992 Maastricht Treaty meant that less competitive euro-zone members, infamously called "PIIGS" (Portugal, Italy, Ireland, Greece, Spain), couldn't devalue their way out of trouble.

It has taken 11 years for the "Euro-train" to derail now under the weight of Greek sovereign debt. At the end of May, Spanish government bonds were downgraded by investors. Then early this week, Germany announced 80 billion euros in budget cuts over the next four years, setting an example to other eurozone members to tighten their belts. Although the European Union's 750-billion-euro rescue package has calmed the markets, structural flaws that precipitated the euro crisis remain. Deutsche Welle spoke to Josef Joffe, editor of the weekly Die Zeit and a Stanford University fellow, about the basic problem of a monetary union without political union.

Die Zeit editor-publisher Josef Joffe

Josef Joffe, publisher-editor of the Hamburg weekly Die Zeit

Deutsche Welle: You wrote a 1997 essay called "The euro: the engine that couldn't" for the New York Review of Books before the euro came into being. You were skeptical about whether the euro would work, a politically incorrect viewpoint at the time.

Josef Joffe: It didn't take a PhD in economics to know that you can't have a monetary union without political union. I used the image of taking 10 train engines and coupling them together. The idea is that they didn't have a lead locomotive. Each of these engines had to move at the same speed at the same time; otherwise the train would derail ... and that has exactly come to pass. The system depended on everyone maintaining the same speed, meaning the same fiscal policy.

Here is one of the nasty paradoxes of monetary union. The PIIGS suddenly were encouraged in their evil ways because they paid the same low interest rates as everybody else and not the (high) preferential rates they'd have to pay if they were still in the lira or drachma, so instead of monetary union inflicting more discipline on them, it made profligacy, easier... That's why we are where we are.

Why is monetary union not possible without political union? Is political union possible?

Let's go back to the metaphor of the leaderless train, made out of these national locomotives. These engineers (national leaders) do not (serve) the common good; they (serve) their passengers (the electorate). They have to win elections…In practical terms, what happens under monetary union is there are only two methods of adjustment if one of the cars goes too fast or too slow and thus threatens to derail. Either the burden of adjustment falls on you, the country, which has to become more competitive by having more flexible labour markets, raising productivity, cutting back on expenditures, etc, or the others share their wealth with the laggard.

train falling off the tracks or derailing in Bavaria

The euro needs fiscal unity, otherwise the train derails

That's exactly what happens inside a federal country like Germany. The rich states in Germany, say Hamburg or Bavaria, transfer wealth to states such as Bremen, which has lived way beyond its means for many years, but we (Germans) do so because they are us. We fork over 4 percent of GDP annually to the ex-GDR (East Germany), because they're poor, they had a harder life for 40 years behind the wall, and we feel guilty. We (in the West) had a much better life... So through common taxation, a common federal budget, money flows to the needy areas.

The problem here is, what obligation do we feel toward the Greeks or to the Portuguese? Well yes, they're Europe but they're not as close to us as the East Germans, so that strains the willingness to extend welfare to those who have in their own profligate ways lost competitiveness in the global market.

German Chancellor Angela Merkel was heavily criticized for waiting so long to help the Greeks.

I think Merkel was right: The burden of adjustment lies on the Greeks. If you run up these debts, if you have this totally overpaid public sector and powerful unions, if your wages are too high, your goods are not competitive on the world market. Should we, the rich Europeans, pay for this? Or shouldn't the burden be on them to change their ways?

But we're all in the euro together. German banks have exposure to Greek debt as well. If Greece, Spain goes down, so does Germany.

100 euro bills tied with chain and lock against background of the greek flag

The EU saved Greece, but the moral hazard is if nations know they'll be saved, they won't change

That's the too-big-to-fail argument. The way our financial markets are integrated …you err on the side of caution. And that creates a moral hazard because the beneficiaries learn we will save them, and therefore they don't have to change. It's a merry go round where there are no fast answers.

The UK is the one major EU country not in the euro. The new Tory government is not especially Europe friendly, but do you see Britain joining the eurozone?

Clearly not. The current crisis, which I don't think will be the last one, has exposed the basic flaws of monetary union. If you don't want to fix up your internal economy by going through hard and painful reforms, it has closed off one escape route - the safety valve of devaluation, which is the door that most nations have always used. In other words, it has closed off the most important part of monetary autonomy. So the Brits, having observed this, are now celebrating the fact that they are not in the euro.

So how can we keep the EU together without transferring funds from rich states to poorer ones?

coral reef in the Philippines

European integration, like a coral reef, doesn't follow a plan but grows unpredictably

We can't. Now we hope there's been this salutatory shock and that we will willingly, in order to avoid the risk of such crises in the future, harmonise our fiscal policies.

So the euro won't fall apart

No, everyone dreads the collapse of the euro more than anything else. The Italians dread it because instead of paying "x" percent interest rates, they would pay "xx" percent interest rates. We Germans dread it because there will be a surge of upward re-valuation of the D-mark, which would wipe out our export surpluses. The PIIGS dread it because they won't know how to borrow money if they went back to escudos and drachmas. By the way, under the treaties (Maastricht, Lisbon), we have no way of kicking anyone out.

The euro will survive because the political will is there, right?

Because collapse would be more horrible than anything else. My metaphor for Europe is the coral reef. A coral reef obeys no plan, but it grows, sometimes a branch breaks off, and another branch starts sprouting, but in general the reef has been growing for the last 60 years.

Interview: Diana Fong
Editor: John Blau

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