Skeptics See Euro Eroding European Unity

The New York Times

November 11, 2013

By DANNY HAKIM

LONDON — Europe’s slow emergence from its second recession in the last five years is raising new questions about whether the euro currency is doing more harm than good.

Five years of crisis have laid bare deep differences in national policies, politics and priorities across the European Union. The 28-member bloc is increasingly confronting a more fundamental problem: whether it is too unwieldy to address the multiplying array of challenges it faces. And in many ways, the most divisive issues involve the 17-member subset of the union that was supposed to give them something in common — the euro currency.

The notion that the European Union has structural deficiencies has been debated almost since its founding. The tension between economic integration and political harmonization is nothing new. But as the global financial crisis is beginning to fade, Europe’s troubles persist, exacerbated by the fissures of the currency union that have impeded the region’s economic recovery.

“My worst fears are confirmed,” George Soros, the Hungarian-born former hedge fund titan, said in an interview.

“This is what I was afraid of, that the euro would be preserved and it would pervert the venture and destroy the European Union,” he said. “Instead of the solidarity that was supposed to be embodied, it became every country by itself.”

The strains are evident at many levels. Hopes for greater political cooperation are falling victim to domestic economic stress in many countries and the rise of populist politics heading into European parliamentary elections next spring. An interest-rate cut by the European Central Bank last week reportedly came over the objections of the German members of the bank’s governing council.

And there are deep divisions within the European Union over a plan to unify the process for identifying and closing down troubled banks — and paying the costs of doing so. Those disagreements could get a further airing this week when euro zone finance ministers meet in Brussels.

The core of the trouble, critics say, stems from the structure of the euro currency union. Unlike a single-currency country like the United States or Britain, it lacks a common treasury and the ability to issue common debt. That has created a poisonous dynamic between creditor nations, like Germany, and debtor nations, like Greece.

True, there have been glimmers of good news lately. Consumer confidence among Europeans has improved, and recession has ended in countries like France and Spain. European stock indexes are up for the year. And yes, the euro in recent months has risen in value against other main currencies — although that is more curse than blessing, because it makes exports relatively more expensive outside the euro zone.

But the big worry lately is the specter of deflation, a doom loop of falling prices, wages and profits that, once underway, is a tailspin hard to pull out of. The fear of years of stagnation was the main impetus for the European Central Bank’s decision to reduce interest rates, over the objections of Germany, which worries that looser money will only encourage profligacy by its weaker euro neighbors.

It is not evident, though, that anything has been gained by the austerity policies that Germany long preached, which have been a drag on economic growth; government debt in the euro zone has risen sharply over the last half decade.

Perhaps worst of all, the various economic afflictions have reinforced the kind of nationalism and xenophobia that the broader European Union project was supposed to chase away.

Nicholas Spiro, founder of a London economic consultancy, said that Europe was “stuck in a halfway house between a shaky and ill-managed monetary union and a more secure economic and political one.” The risks are increasing of “one of these countries’ politically imploding,” Mr. Spiro said.

Fabrizio Saccomanni, the Italian finance minister, said in a speech last week that the European Union needed to have a philosophical reckoning of sorts, as his country prepares for a stint next year holding the six-month revolving presidency of the union.

“The time has come for a frank discussion of what we want to do with the European construction in the future,” he said in a speech at the London School of Economics. “What went wrong was not the fact that the project was imperfect, it was that it was not carried out to its full realization.”

“People want to know,” he said, “whether what we’re building is a common market with no rules, except perhaps general principles about fair trade, whether we want to build a confederation of states, whether we want to build a federal state, or a superstate, or just a monster bureaucracy that has no legitimacy whatsoever.”

A few numbers shed some light on the euro zone’s struggles. In the United States, gross domestic product is forecast to be up 5.9 percent this year from its level in 2008, using data provided by the European statistical agency, Eurostat. It will be down 2.1 percent in the euro zone over the same period. At the same time, overall government debt has increased in the euro zone from 70 percent of G.D.P. in 2008 to about 90 percent last year.

There are still voices of optimism, to be sure. Mario Draghi, the president of the European Central Bank, brushed off suggestions last week that Europe was sinking into the kind of long-term stagnation that plagued Japan for decades.

“If you look at the euro area from a distance, you see that the fundamentals in this area are probably the strongest in the world,” he said at a news conference. “This is the area that has the lowest budget deficit in the world,” he said, as well as the highest trade surplus.

An assessment last week from Olli Rehn, the European Union’s commissioner for economics and monetary affairs, was bleak. He said economic output would shrink slightly this year in the euro zone, and while he forecast growth of 1.1 percent next year, he said unemployment would remain high at 12.2 percent. Mr. Rehn, who is under pressure to do more to push Germany to reduce its trade surplus with other member states, will issue annual report cards on the national budgets of euro zone members on Friday. He is expected to chide France once again for not doing more to meet key deficit-reduction targets.

François Heisbourg, a military expert at the Foundation for Strategic Research in Paris, said the currency union’s problems have been a debilitating distraction from the broader European project. “We have been paying too much attention to the euro and not enough attention to the European Union,” he said.

Mr. Heisbourg is author of a recent book, “The End of the European Dream.” While he is pro-European, he said the euro was not viable without a major shift toward a more federal structure. But that, he said, is not politically feasible.

As a result, Mr. Heisbourg said, European officials should begin to “look actively at the possibility of unraveling the euro in an orderly manner,” he said. “I’m not saying it’s a great option. I’m not saying it’s easy to do and it’s not traumatic. And I do say it’s dangerous, but what are the other options? The federal option is not on the table, and what is currently occurring, the transfer of major liabilities to the creditor countries like Germany, is economically and politically corrosive.”

Mr. Soros largely agrees. He said that an orderly division of the currency zone into northern and southern parts “could cure the disparity in competitiveness much faster than sticking together.”

“But Germany does not support that,” Mr. Soros said, “and the other countries can’t impose it. Therefore it is not going to happen.