Europe's Currency Union: A Bad Marriage That May Have To End

The European currency union has become like a bad marriage whose deep-seated problems have burst embarrassingly into public view, while the beleaguered partners stay together for the sake of the children. Maybe it's finally time for the unhappy couple to own up to the fact that they were never meant to be together.
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The European currency union has become like a bad marriage whose deep-seated problems have burst embarrassingly into public view, while the beleaguered partners stay together for the sake of the children. Maybe it's finally time for the unhappy couple to own up to the fact that they were never meant to be together. They bring too much historical baggage (a couple of World Wars, disagreements about whether it's okay for pork products to hang in shop windows). It often seem as if they are speaking different languages! The children -- Greece, Italy, Spain, Portugal and Ireland, for openers -- might actually be better off living by themselves. (Because, really, if your parents were Germany and France, with each decision in your life requiring their peaceful concurrence, how long ago would you have run away from home?)

The latest arrangement aimed at perpetuating this unhappy marriage is now emerging from the therapist's couch in Brussels, where most of Europe's member states were on Friday preparing to pledge that their finances should be tied together collectively in the name of fiscal discipline. Only one nation was holding out: Great Britain.

This deal, if it happens, sounds like a big one. It's certainly a major step toward the sort of integration that Europe structurally requires to instill faith in its common currency, the Euro (a marriage agreed to hastily, in the presence of a hired Vegas pastor, without a prenuptial agreement or consideration of the consequences). Except that no one familiar with the inner workings of this dysfunctional family of nations has any reason to believe that this pledge of fiscal fidelity will survive any better than so many other past declarations of faith.

What will come of this pledge, however, is a general reinforcement of the fiscal austerity that has become a leading source of strife under much of the European roof. For the moment, the market appears pleased that another deal is emerging to stave off the ugly, tabloid-fare divorce it has been fearing -- an abrupt dissolution of the Euro, with all the potential financial havoc. But the pattern here is already clear, and it is not comforting: Next comes the market's slower realization that Europe has no fuel for growth, which means more joblessness and bank losses and unhappy citizens taking to the streets to decry the slicing away of subsidies and public spending; and all of this resulting from the fiscal discipline Europe has embraced as the key to strengthening its marriage.

It's as if a couple, exhausted by years of bickering and distrust, has decided that the key to fixing its troubled marriage is to promise to never go to the movies again, forgo presents and dessert, and ditch cuddling as a timesuck that distracts from standing on the street selling the wedding presents.

But what about the children? Back when a deal might have still been struck that could have allowed the European Central Bank to function as lender of last resort, standing at the ready to assist Italy and Spain, along with Greece, it made all the sense in the world to strengthen the currency union and tighten the strictures that govern what member nations can do with their budgets. If the central bank is to print Euros to lower borrowing costs and alleviate worries of sovereign default, then, yes, it seems perfectly reasonable that rules ought to govern how big the budget deficits can be, with a central arbiter in Brussels keeping the books in order.

But the Germans -- who like central bank intervention about as much as the Dutch like Germans -- keep making it clear that this will not happen, not so long as Berlin is the largest guarantor of the funds. And this German unwillingness to arm the central bank to attack the crisis has become a leading source of fear in the global marketplace; fear that Europe will never solve its problems. This is why borrowing costs have been rising across the continent. This is why ratings agencies are downgrading sovereign debt, which exacerbates the borrowing costs.

There is no love and trust in this marriage, only talk of regimented rules. Market confidence rests on faith that someone really will step in when push comes to shove. All the markets hear now is lectures from Germany about fiscal prudence. This week, the new central bank chief, Mario Draghi, confirmed that his institution cannot be counted on to rescue the ailing and dismissed talk of selling bonds backed by the credit of member states.

Each deal to emerge from each summit has led only to another realization that yet another, bigger deal is yet required. Each failure to bolster confidence simply reinforces the reality that the nations in this marriage don't like each other and will be here again, pointing fingers. This makes the market nervous. The market is the guy walking by the house, wondering if he wants to buy the vacant place next door, and not liking the sound of shouting and breaking glass.

The children, as it were, might find more rewarding futures on their own. If Greece were to leave the structures of the Euro, it could devalue its own currency, making itself more attractive as a tourist destination. Italy could do the same, instantly boosting the competitiveness of its globally beloved products. Spain and Ireland would derive the benefits of lower-valued currencies, removing the straitjacket on their growth that has made high unemployment an entrenched feature of life.

To which you may rightly say, enough with the metaphor. Europe isn't a marriage. It's the world's largest marketplace, and its finances are intimately tied up in the rest of the global economy. An unruly end to its currency union could wind up being a Lehman Brothers-like event on many shores, sending money on a panicked retreat out of anything that looks even a smidgen risky. That could hurt small businesses in the United States, prompting fresh layoffs and unleashing another wave of anxiety and uncertainty.

All valid fears, but the problem is that a lot of these things are already happening, spilling over into other countries. We may be experiencing a Lehman-like event in slow motion.

All eyes turn to the slowdown in China, where the great export machine no longer looks indomitable, in part because of weakening orders from Europe. Small businesses in the United States are already complaining of difficulty getting their hands on money, and part of the reason is the nervousness of major banks to lend, so long as the great uncertainty of the Euro and its potential dissolution persists.

The end of the Euro poses serious consequences, make no doubt about that. But maintaining the Euro without the necessary political agreement is a status quo that also has serious consequences. Getting to something better requires a spirit of unity that is lacking among the participants -- not because the partners aren't trying, but because they have irreconcilable differences. In Germany, fiscal discipline and fear of inflation are like a national religion. In Italy, Greece and Spain, fiscal discipline is destroying any hope for the future. Let's call the whole thing off.

Europe has become a codependent relationship, staying together for the sake of children, who are increasingly screwed up as a result of being reared by parents who are always storming away from the dinner table before the nourishment is complete. Peace reigns at the moment, but it's hard to believe it will last, because it never does.

Breaking up is hard to do, but it may very well be inevitable. If that's the case, better to do it earlier, while everyone can still get on with their lives.

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