It was not supposed to turn out like this. At the core of the euro, the supranational currency at the heart of the Economic and Monetary Union (EMU), is a tale of faltering ambitions and unrequited hopes. Launched in 1999 as one of Europe's brightest success stories, the single currency has become a saga of Wagnerian intensity, full of interweaving subplots in which the grandest designs have been subverted, the most beguiling intentions contorted, the most elaborate political calculations turned to dust. Monetary union threw a veil of comfort and well-being over the fortunes of the continent. In 2009 and 2010, the veil was ripped away.
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With a unified monetary and interest rate policy that by 2011 encompassed 17 countries, the EMU and its key institution, the Frankfurt-based European Central Bank (ECB), were conceived as breaking down barriers between people, companies, and markets -- a force for unity and prosperity following the fall of the Berlin Wall, the reunification of Germany, and the ending of the communist-capitalist divide.
Some of the euro's achievements are incontestable. The euro area makes up one-fifth of the global economy and contains a population of 330 million -- in economic size, roughly equivalent to the United States. The ECB, keen to uphold a rigorous monetary reputation, has built up respect and acumen in the councils of monetary power around the world. The euro is the second-most important international currency after the dollar, of major significance in financial market transactions and in the holdings of central banks, pension funds, insurance companies, and government agencies around the world. In cash terms, there are 15 to 20 percent more euros in worldwide circulation than dollars.
Yet, a dozen years after its birth, the EMU has become Europe's melancholy union. The roots of its travails, or at least some of them, lie outside Europe: the buildup of massive, footloose investment capital by fast-growing developing nations like China; tightened conditions for international borrowing and lending after the U.S. home loans crash in 2007 and the downfall of New York investment bank Lehman Brothers in 2008; and then, in 2009, the worst world recession since the 1930s. But the central reasons for the dashing of European dreams have been relentlessly homemade. They lie in the EMU's inherent encouragement, through the "one-size-fits-all" interest rate policy, of vulnerable member states to live beyond their means, and in the extraordinary failure of Europe's governments and financial authorities to heed the warning signs and take corrective action until it was far too late.
The euro's advantages were meant to be self-fulfilling; success would feed on itself. Yet as a result of the defects revealed in 2009-2010, European countries have had to embark, within a period of just two years, on a massive program of financial overhaul for which they were almost completely unprepared and which dwarfs, in real terms, the sums of money mobilized to repair Europe after the end of the first and second world wars. The single currency bloc stands revealed as a zone of semipermanent economic divergence, corrosive political polarization, and built-in financial imbalances, beset by a perpetual penumbra of hope and pain. For the broad mass of the European electorate, "Europe" has become a byword for unpopular and painful economic restructuring. In allocating funds to prevent payments and debt disparities from destroying the euro, EMU governments have decided to commit colossal sums of taxpayers' money they cannot afford to heal internal disparities they cannot conceal to shore up an edifice many believe cannot stand -- at least, not in its current form.
To correct the malignant effects of years of economic recklessness, Europe, backed up by the International Monetary Fund, is imposing austerity and belt-tightening on the problem-ridden peripheral states led by Greece, Ireland, and Portugal, in exchange for emergency financing to help them pay their massive debts. These countries, three of the smaller economies in the euro, ran into serious problems in 2009-2011 as a result of a large increase in debts built up due to low interest rates and faulty supervision after the monetary union started, with the Greek imbroglio considerably worsened by government manipulation of key statistics that camouflaged the true extent of the country's economic deterioration. As part of crisis measures, the creditor nations -- with Germany in the vanguard -- are being asked to join in the sacrifices by taking a soft line over repayment of the problem states' existing debts, as well as by guaranteeing new ones.
European banks, severely weakened in many cases by the collapse of the pre-2007 global credit boom, have been drawn into the fray through their involvement as owners of hundreds of billions of dollars of government bond issues of the hard-hit peripheral states. European governments, powerfully backed by the ECB, have been reluctant to see the banks suffer outright losses through restructuring of the deficit nations' debts. The result is that responsibility for bailing out the errant eurozone members has been inexorably shifting away from the banking sector to taxpayers in the better-off countries.
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