The Euro Crisis: A Case Study

Posted on July 28, 2012 in Biz and Eco, Specials

By Subhayan Mukerjee:

The economic and political success of the United States of America, since the end of the Second World War had prompted their cousins across the Atlantic to dream of an entity that could be called the United States of Europe. But between this vision and its implementation lies a plethora of political, linguistic, financial and nationalist borders, that cut up and divide Europe into small nation states, many of which are similar in physical and economic size to the states of America. This proliferation of borders in Europe has had a crippling effect on its economic wellbeing, especially after the European states lost the colonial hinterlands in Asia and Africa whose natural resources were the bedrock of their economic health. To compensate for the loss of the colonies, European nation states have been dreaming of an economic and political union that would rival the Russian confederation of the East and the United States on the other side of the Atlantic.

The path to this final union was supposed to lie through three steps. The first is the European common market that would dissolve trade and customs barriers across Europe and convert it into one economic entity. The second step was to give this economic entity a common European currency called the Euro. And the third step which has not been fully implemented is the creation of a European parliament in Strasbourg which would create an entity where individual European nationalities will be subsumed.

This glorious vision of European political unity could have been realized if the laws of economics and that of human behavior were not so obstinately complex. Between the proverbial cup and the limp, between the monetary union of Europe and the vision of a unified political entity based out of Strasbourg, Europe suffered a major slip, or rather, stumbled and fell flat on its face, precisely because the economic union was not supported by the underlying political union. The behavior of a currency, in terms of its valuation with other global currencies is closely governed by the nature of the economy, which in turn is governed by underlying political decisions regarding government spending, fiscal deficit and public indebtedness. If governments behave with reckless profligacy, the worth of the currency decreases. But in the case of Europe, we have the paradoxical situation of a currency which is supposed to have the same value across all of Europe, but is supported by political and economic policies that are vastly different from each other. These internal inequalities are the cause of economic distortions that have brought Europe to a position where a single economic currency seems to be an impossibility.

Countries like Portugal, Ireland, Italy, Greece and Spain have run up huge national debts which they have no way to repay. Usually this would have meant their currencies would be devalued. But this is not possible because the same Euro is also being used by Germany and France, where the economy is stronger and where the currency is more valuable. There is no easy answer to this conundrum. Either the Euro must be broken up or each country should return to the use of its national currency. Or, each individual European country must surrender its political sovereignty or at least its economic sovereignty, which is its right to print currency, to a unified central bank. Surrendering sovereignty at the altar of a unified Europe is something that the countries of Europe are not yet reconciled with. On the other hand, the break of the Euro is an equally frightening possibility that threatens to unravel the carefully assembled work of European unity that Europeans have been striving for since the end of World War 2.

Europe is caught between a rock and hard place, between Scylla and Charybdis, and between the devil and the deep blue sea. No one knows what the answer to this predicament is. So everybody has stopped thinking and is now waiting for Danny Boyle’s spectacular opening to the London Olympics.

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