When the going gets tough, the disunited struggle to get going. The 16 nations that use the euro as their currency, the eurozone, have converted an accounting scandal in a minor economy into a continental financial crisis that threatens the global economy. What is worse, the eurozone governments still don’t seem to understand how to restore confidence in the world’s second reserve currency. The key euro countries, Germany and France, are blaming speculators and market forces. But the truth is that the euro-crisis is largely the creation of governments. From the fiscal fraudulence of successive Greek governments to a bailout that was delayed by petty German and French political concerns, it has been the State that has consistently been behind the curve.
The eurozone governments are also responsible for leaving enormous vulnerabilities in the common European economy. The euro was a great accomplishment of European unity. However, it was a job half-done. A common currency is only a single component of an economy. A unitary labour market, a common fiscal policy and, ultimately, a single political structure are also requisite. But Europe did nothing on those. Many southern European economies leveraged the strength of the euro to increase salaries and incomes instead of improving economic productivity. In effect, they lived on debt sold to other eurozone economies. The instability of this structure was revealed when the subprime financial crisis placed it under stress. What the eurozone governments should have understood was that their economic system was one in which the normal checks and balances of the market could not operate. So when it began to go off the rails, the only solution was governmental intervention. Instead, they dithered. Ultimately, they put together a bailout for Greece that has been adjudged ‘too little, too late’. As a consequence, the original source of the crisis — the Greek government’s inability to cover its debts over even the next two years — remains unresolved.
As European banks see their balance books erode, the rest of the world is reacting negatively. The eurozone’s financial sector is closely interlinked to those in the US and Japan. The European Union, dominated by the eurozone, is the largest trading and investment partner for almost every major economy in the world. Indian companies are already finding it hard to raise capital overseas. A collapse of European demand would devastate the country’s export sector. What is worse is that just when the world is getting over the subprime crisis, the unwillingness of the eurozone’s political leadership to take decisive action to save their proudest economic creation may push the globe down another slippery slope.