The euro zone: same bed, different dreams

By Paul Taylor – Analysis

PARIS (BestGrowthStock) – Like a ghastly family row in which relatives dredge up long-buried grievances, Greece’s debt crisis is driving Europeans to exhume old fears and resentments in a bitter debate about the future of their common currency.

Behind the dispute about whether and how to help Greece, the most egregious violator of the European Union’s fiscal rules, lies an unresolved difference between founders Germany and France about the nature and purpose of the euro.

With governments in Berlin, Paris and Athens under strong and contradictory pressures from anxious voters, recrimination is starting to get out of hand.

“All the old debates that preceded and accompanied the launch of the euro are coming to life again after a decade of relative stability that had made them appear largely academic and historical,” says Thomas Klau, co-author of a book on the birth of the single European currency (*).

Germans accepted monetary union in the 1990s on condition the euro would be as strong as the deutschemark, with low inflation, strict budget discipline and no bailout for the weak.

The Germans insisted on a European Central Bank ind ependent of political influence with a mandate to ensure price stability. They wanted a small starting group of like-minded north European economies, excluding southern rim states dubbed the “Club Med.”

The once-mighty German central bank, the Bundesbank, warned at the time that monetary union without strong political and economic integration was potentially fragile, but was overruled.


France saw the euro from the outset primarily as a political project to anchor a united Germany into Europe and build the EU’s international power.

The French wanted a softer currency with an exchange rate managed by finance ministers to keep French planes and grain competitive on world markets.

Paris sought a “European economic government” to act as a counterweight to the ECB and promote EU industrial champions.

And it wanted a broad founding group including the “Club Med” countries to shield its own factories and farms from competitive devaluations by Spain and Italy.

In the grand bargain, the Germans got their hard euro, independent ECB and what seemed then like tough budget deficit rules leading to possible sanctions against repeat offenders.

The French got the Club Med and a treaty clause giving the council of EU finance ministers responsibility for exchange rate policy, which has never been applied.

For 10 years, the euro has been a striking success, bringing unprecedented currency stability, price moderation and low interest rates to the region.

But now that Greece’s giant debt and deficit have highlighted the shortcomings of the fiscal rules, the Germans and French have reverted to type in the solutions they advocate.

German media, egged on by politicians who should know better, are depicting the crisis as “lazy Greeks endangering hard-working Germans’ money,” said Ulrike Guerot of the European Council on Foreign Relations in Berlin.

Berlin is hardening its stance against any European rescue and pointing Greece toward the International Monetary Fund if it needs standby loans. France sees calling in the Washington- based lender as a political humiliation for the euro zone.


The Gemans want new EU instruments of torture to enforce budget discipline more tightly on sinners.

Suggestions range from making states with excessive deficits and debt pay insurance contributions to a European fund, to the possible loss of fiscal sovereignty, EU voting rights and ultimately expulsion from the euro zone for repeat offenders.

Chancellor Angela Merkel’s call for a treaty change to allow the expulsion of errant euro members caused shock and dismay in Spain, Greece and Belgium, where former Prime Minister Guy Verhofstadt accused her of no longer wanting European solutions.

German Finance Minister Wolfgang Schaeuble wants a European Monetary Fund, not so much to nurse sick countries back to fiscal health as to punish them for misbehaving and provide an orderly insolvency process to avoid contagion in the euro area.

In France, itself no model of fiscal discipline, the first instinct is for European “solidarity” with Greece (i.e. mostly Germany signing a cheque).

The French see the crisis as demonstrating the need for a European economic government that would coordinate industrial and budget policies better, and help rebalance Germany’s export-oriented economy toward greater domestic consumption.

President Nicolas Sarkozy is open to an EMF but would want it to raise money cheaply on capital markets and lend it to needy euro zone countries before they face possible default.

Last week’s suggestion by French Finance Minister Christine Lagarde that selfish German economic behavior might be part of the euro zone’s problem stirred outrage in Berlin.

Schaeuble said her comment that Germany could ease up on aggressive export promotion and consume a little more was like urging a soccer team to play badly to give rivals a chance.

“Christine, I’m a Bayern Munich fan. When Bayern were outplayed twice by Olympique Lyon in the Champions League, I thought to myself, if Lyon had only played a bit worse, Bayern would have had it easier. But we can’t build a competitive economy on this basis,” he retorted.

* “Ces Hommes qui ont fait l’euro,” with Jean Quatremer, 1999, Plon.

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(additional reporting by Paul Carrel in Berlin, editing by Ron Askew)

The euro zone: same bed, different dreams