A sovereign default seems increasingly probable for the bankrupt Greek state. Experts disagree about the consequences of such a scenario for the world economy. One thing seems certain: the future of the euro and of the European Union will be affected.
The creation of a common currency for the European continent was an incredible success story. Who would have thought, 20 or 30 years ago, that the French would relinquish the franc and the Germans the deutsche mark? Well they did. To most observers’ surprise, the change happened quite smoothly and the euro rapidly became one of the world’s strongest currencies.
When the euro was introduced in 1999, many economists thought that it did not make sense to create a common currency without putting in place institutions to coordinate economic and budgetary policies. True, a European Central Bank took over as the common central bank and the members of the monetary union agreed to abide by a couple of fiscal rules : any member country’s deficit and public debt would not go beyond 3% and 60% of GDP respectively. But those rules were never enforced as the fiercest supporters of the euro, France and Germany, were the first to ignore them.
The euro helped the continent’s weaker economies grow rapidly but it also encouraged them to borrow excessively, which explains the current difficulties of Greece and of other "PIGS" (Portugal, Ireland, Italy and Spain). Most specialists believe that to prevent such a crisis in the future, Europe will have to give itself the tools to manage a monetary union. The president of the ECB, Jean-Claude Trichet, has called for "budgetary federalism" and a European minister of Finance. However, because citizens of most European countries have grown wary of the Brussels bureaucracy, it seems improbable that the heads of government will go forward with such policies. Or if they do, they will operate by stealth; the word "federal" will not be pronounced.
Yet, the Greek crisis clearly indicates that the status quo is not an option. Therefore it is very difficult to predict what will happen. If Greece defaults, will it drop the euro and go back to the drachma? Could other weak economies follow suit? If so, will the euro’s credibility be weakened? How will that impact the larger process of European integration?
The EU is one of the most important achievements of the 20th century. It fosters peace and prosperity on a continent that for centuries had been torn apart by war. I hope its leaders will find the courage and the audacity to find solutions that increase the continent’s coherence and solidarity.
However, I realize that that road is full of obstacles, the more daunting one being the resistance of the majority of the citizens. The first task of political leaders is therefore to convince their respective voters that solving their economic problems requires not less but more Europe. No easy task, to say the least.
Photo courtesy of Reuters.