Project Syndicate
FRANKFURT
– The euro crisis has already transformed the European Union from a
voluntary association of equal states into a creditor-debtor
relationship from which there is no easy escape. The creditors stand to
lose large sums should a member state exit the monetary union, yet
debtors are subjected to policies that deepen their depression,
aggravate their debt burden, and perpetuate their subordinate position.
As a result, the crisis is now threatening to destroy the EU itself.
That would be a tragedy of historic proportions, which only German
leadership can prevent.
The
causes of the crisis cannot be properly understood without recognizing
the euro’s fatal flaw: By creating an independent central bank, member
countries have become indebted in a currency that they do not control.
At first, both the authorities and market participants treated all
government bonds as if they were riskless, creating a perverse incentive
for banks to load up on the weaker bonds. When the Greek crisis raised
the specter of default, financial markets reacted with a vengeance,
relegating all heavily indebted eurozone members to the status of a
Third World country over-extended in a foreign currency. Subsequently,
the heavily indebted member countries were treated as if they were
solely responsible for their misfortunes, and the structural defect of
the euro remained uncorrected.
