Without the euro, would Europe have turned to war?
By John Kornblum,
For the fathers of the euro, the end of the Cold War in 1990 was a time for worry as well as celebration. As they looked to the future, they were also obsessed with the continent’s bloody past. Would a new Europe, and especially a reunified Germany, reawaken old nationalist sentiments and lead again to the danger of war?
Germany’s Helmut Kohl and France’s Francois Mitterrand — and just about every European leader since — saw a common currency as essentially a political project, meant to cement European unity and remove that danger. For them, a world without the euro would have been a world increasingly threatened by conflict and perhaps even war.
Because of these fears, the euro project was rushed through without key agreement on the common political institutions that would have turned Europe into a truly unified economic zone. As a result, each country follows its own economic policy; Greece spends, while Germany saves. And markets have been quick to focus on the weakest links, threatening the entire euro by nearly driving countries such as Greece and Portugal to bankruptcy.
War would not have come to Europe, with or without the euro. A prediction made by Harvard economist Martin Feldstein in 1997 seems closer to reality. He argued that the introduction of the euro would lead to major friction within the European Union, because the problems in maintaining a common currency among so many countries would create confrontations and a rebirth of nationalism.
Feldstein was right. The current euro crisis has frayed nerves so much that Europeans have become more aggressive and even nationalistic again.
The polite tone cultivated for decades by E.U. partners has disintegrated into a tirade of insults. Germans have called the Greeks lazy, corrupt and just plain stupid. The news media in Germany gleefully point out Greek billionaires who pay no taxes, workers who retire at 50and harbors filled with the yachts of the idle rich. German politicians have suggested that Greece sell some islands to repay its debt. In return, Greeks have pulled out the Nazi card, claiming that the Germans owe them billions in wartime reparations.
The other fear in 1990 was that, without the euro, a reunified Germany would again dominate the continent. If Germany gave up its currency, France would support its reunification; the euro would help keep Berlin tied to Europe. German Chancellor Angela Merkel never tires of repeating this mantra — “If the euro fails, the entire European project will be at stake” — when she calls for another bailout of Greece or Portugal or whoever else is on the brink.
But in the past 20 years, the opposite has happened. The Germans reformed their economy. Today, instead of being controlled by the French, they are acting independently as they call the shots in an E.U. of 500 million people.
Without the euro, Germany would still be Europe’s most powerful country, but it would not have the multiplier of a common currency. Using the euro was the equivalent of Americans maxing out their credit cards. Being able to borrow at low German rates helped create real estate bubbles in Spain and Ireland and sent the Greeks and Portuguese on a spending spree.
It is Germany that has profited most from the profligacy of other Europeans, who take 75 percent of its exports. Even if Greece goes bankrupt, those Mercedes and BMWs were bought with cash borrowed from German banks. The profits need not be sent back.
So without the euro, there would probably have been less conspicuous consumption, and Germany might not have become the powerhouse it is today. But there could have been another important consequence. Europe might not have contributed as significantly to the 2008 financial crisis.
European banks wanted to find higher returns for the profits they were making by lending all that money to Greece and their other southern neighbors. So what did they do? They bought hundreds of billions of dollars worth of subprime mortgages and went through a real crisis in 2007 and 2008. European banks are now foundering again as their exposure to the government debt of countries such as Greece threatens further big losses. That is partly why central banks in Europe and the United States promised this month to pump more dollars into European banks to help them pay their debts.
And that’s the reason Treasury Secretary Timothy Geithner went to Poland to try to jawbone the Europeans into actually doing something about their problems. He invited himself to one of the many crisis meetings of European finance ministers, who are looking desperately for ways to calm things down. But Geithner severely misjudged the mood. He was sent packing, with instructions to clean up his own act before giving Europeans unwanted advice.
Geithner’s mistake was to think that the ministers were talking about banking or deficits — or about money at all. They were really still talking about the war and the fears that motivated Kohl and Mitterrand. Geithner didn’t understand the secret code. The meeting was not about action but about how best not to do anything drastic.
This is perhaps the most important implication of the way the euro was set up. Rather than being kept free of politics, as was originally intended, management of the currency has become a political football knocked back and forth by the growing resentments between richer and poorer Europeans. The poorer countries reject the austerity measures necessary to meet German standards. The Germans refuse to take the steps necessary to build a true economic community. The result is a standoff.
Instead of acting decisively, as Geithner demanded, European governments feel limited by their commitment to “Europe” to taking small steps that will not endanger the balance within the E.U. This overwhelming fear of internal conflict is the real legacy of World War II, one that has burdened the European Union since its birth in 1957. European politicians may not be experts on finance, but they do know their voters. Doing nothing is better than risking hard-won stability.
Would Europe be better off without the euro? Perhaps. Globalization would have still decimated its weaker economies, and even without the easy borrowing in the euro zone, smaller southern members of the E.U. would probably be facing some sort of economic crisis. But if the euro hadn’t been implemented as a political project in a Europe not ready for a common currency, experts could probably clean up such a situation fairly fast. But now, they can’t. Because in the end, such decisions are still about the war.
John Kornblum, senior counselor with the international law firm Noerr LLP in Berlin, served as the U.S. ambassador to Germany from 1997 to 2001.