The New York Review of Books.
I have been a fervent supporter of the European Union as the
embodiment of an open society—a voluntary association of equal states
that surrendered part of their sovereignty for the common good. The euro
crisis is now turning the European Union into something fundamentally
different. The member countries are divided into two classes—creditors
and debtors—with the creditors in charge, Germany foremost among them.
Under current policies debtor countries pay substantial risk premiums
for financing their government debt, and this is reflected in the cost
of financing in general. This has pushed the debtor countries into
depression and put them at a substantial competitive disadvantage that
threatens to become permanent.
This is the result not of a deliberate plan but of a series of policy
mistakes that started when the euro was introduced. It was general
knowledge that the euro was an incomplete currency—it had a central bank
but did not have a treasury. But member countries did not realize that
by giving up the right to print their own money they exposed themselves
to the risk of default. Financial markets realized it only at the onset
of the Greek crisis. The financial authorities did not understand the
problem, let alone see a solution. So they tried to buy time. But
instead of improving, the situation deteriorated. This was entirely due
to the lack of understanding and the lack of unity.
The course of
events could have been arrested and reversed at almost any time but that
would have required an agreed-upon plan and ample financial resources
to implement it. Germany, as the largest creditor country, was in charge
but was reluctant to take on any additional liabilities; as a result
every opportunity to resolve the crisis was missed. The crisis spread
from Greece to other deficit countries and eventually the very survival
of the euro came into question. Since breakup of the euro would cause
immense damage to all member countries and particularly to Germany,
Germany will continue to do the minimum necessary to hold the euro together.
The
policies pursued under German leadership will likely hold the euro
together for an indefinite period, but not forever. The permanent
division of the European Union into creditor and debtor countries with
the creditors dictating terms is politically unacceptable for many
Europeans. If and when the euro eventually breaks up it will destroy the
common market and the European Union. Europe will be worse off than it
was when the effort to unite it began, because the breakup will leave a
legacy of mutual mistrust and hostility. The later it happens, the worse
the ultimate outcome. That is such a dismal prospect that it is time to
consider alternatives that would have been inconceivable until
recently.
In my judgment the best course of action is to persuade
Germany to choose between becoming a more benevolent hegemon, or leading
nation, or leaving the euro. In other words, Germany must lead or
leave.
