A Greek deal cannot fix the flaws in the euro

Watching the Greek crisis unfold, I found myself torn between two equal and opposite thoughts. First, the euro cannot survive. Second, everything must be done to save the euro.

The agreement reached between Greece and its eurozone creditors is therefore a good thing because it has put off the immediate threat of a political and economic crisis. But experience suggests that a debt deal with Greece may be only marginally more durable than a ceasefire in Ukraine. In both cases, there are underlying tensions and problems that cannot be solved by a cleverly drafted document.


Ever since a single European currency was first mooted, I have believed that it would eventually collapse. That belief is based on three simple propositions. First, a currency union cannot ultimately survive unless it is backed by a political union. Second, there will be no political union in Europe because there is no common political identity to underpin it. And so, third — the euro will collapse.

Plenty of people have attempted to convince me, over the years, that each of these three propositions is simple-minded and wrong. But events keep driving me back to the idea that the euro lacks the political and economic underpinning that it needs to survive.

The Greek crisis is a case in point. The most passionate pro-Europeans are right that the only long-term alleviation of the problems of the weaker economies in the eurozone would be to set up a genuine transfer union, in which tax revenues automatically flow from rich areas, such as Germany, to poor areas, such as Greece. But that is never going to happen because the Germans and Greeks do not trust and like each other enough to merge their fates in a real political union.

Northern Europeans will grudgingly extend conditional loans to the south. But they will not consent to the kind of automatic fiscal transfers that happen in a nation state because they suspect, correctly, that the political cultures of countries such as Greece and Italy are profoundly different from those of Sweden or Germany.

The predictable problems with the currency union also extend to economics. Eurosceptics always foresaw that countries such as Italy would struggle to cope in a euro-area, where they could neither devalue their currency nor use inflation to reduce the burden of debt. So it has proved — and, as a result, nations such as Greece, Italy and Portugal risk being slowly crushed under the burden of unemployment and debt.

But there is one aspect of the euro crisis where my starting certainties have given way to doubts. My initial belief was that since the euro was a bad idea, its collapse could only be a good thing. Now I am not so sure.

The economics of collapse of the single currency look increasingly alarming. If Greece had made a so-called “dirty exit” from the euro, at the very least it would have provoked a financial crisis in Greece itself.


The wider euro area would also have been vulnerable. The Germans and others have said repeatedly that the euro is now strong enough to withstand a Grexit. But if Greece fell out of the single currency zone, speculators would surely start eyeing up the next vulnerable straggler in the euro herd. And, as doubts grew about the fate of Portugal or Italy, the complacency of financial markets could swiftly turn to panic.

A disorderly break-up of the euro would also raise profound political questions, including the survival of the EU itself. If Greece or other highly indebted countries were to leave the euro, they would surely have to repudiate their debts; otherwise those obligations would become even more crippling as they attempted to pay them back in a new and rapidly plunging currency. Yet it is hard to see how northern European countries could continue to work placidly in a law-governed EU, alongside other states that had just defaulted on their debts to them.

Europe can ill-afford the political disarray that would be caused by the collapse of the euro. In fact, there has rarely been a period when it is more urgent for Europeans to work together. The war in Ukraine means that European countries once again face a genuine security threat from Russia.

It is true that it is Nato’s job to provide the direct, security response. But the EU is critical to organising and maintaining a united European response to Russian aggression, through sanctions. That is why Moscow is so intent on disrupting EU unity.

The challenge of Russia is not the only problem that makes EU solidarity particularly important at the moment. There are going to be many more refugees heading towards Europe from north Africa and the Middle East in the near future and the EU badly needs to organise a collective response.

Above all, at a time when political extremists of the right and left are gaining ground in Europe, the EU serves as an important enforcer of basic, liberal values. At times, the political correctness of Brussels can be grating and smug. But it is infinitely preferable to the political incorrectness of racists and nationalists, such as the National Front in France or the Sweden Democrats.

So the news that Greece and the eurozone have come to a grudging agreement is a relief. But while the euro has been reprieved for a while, I still fear that it cannot ultimately be fixed.


Gideon Rachman


Fonte: FT