Are the best days of the European Union already behind it? Just a few months ago, having won the Nobel Prize for Peace, it could boast of decades without a major war, the westward turn of the former Soviet satellites, and flourishing internal trade. But now its one big mistake -- the euro -- threatens to tear the union apart.
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In 1999, the traditionally hard currencies of Europe's north merged with the softer currencies of the south to form a new money that was somehow supposed to be stronger than any of the ones it replaced. Under the stewardship of the European Central Bank (ECB) in Frankfurt, the euro was meant to -- and did -- become a reserve currency to rival the dollar. Though the supposedly prudent northern countries didn't always keep their budget deficits under control, they still managed to survive the worst of the global economic downturn. By contrast, the profligacy of the south, together with its flawed banking systems, has created a hotbed of crises that stretch 2,300 miles from Lisbon to Nicosia.
These crises would have been a lot shorter if the countries involved -- Greece, Portugal, Spain, now Cyprus, soon Slovenia, and perhaps Italy for a second time -- had possessed their own currencies. But all of them use the euro, so their monetary policy is set in Frankfurt at the ECB. Instead of devaluing their currencies in order to spur exports and ease the repayment of debts, all of these countries have had to undergo some combination of fiscal austerity, deflation, and, most notably in Cyprus's case, loss of assets.
The people of Europe's south are understandably unhappy. Indeed, the daily indignities of their economic Calvary would be bad enough if they were of completely domestic origin. But southerners also have the irksome feeling that bureaucrats and politicians in Frankfurt, Brussels, and other northern capitals are forcing these troubles upon them. Not long ago, some of the same bureaucrats and politicians were the ones luring the southern countries into the euro, often paying scant attention to their questionable fiscal situations.
Savvy operators in the south have not hesitated to exploit this volatile brew of economic hardship and hypocrisy, mixed with a generous dash of historical resonance. Parties at the extremes of the political spectrum have been gaining adherents, with nationalism a strong current on both sides. And so, in most of the southern countries, the balances of political power have been starting to fragment.
One way to measure this fragmentation is the Herfindahl Index, which economists use to measure the degree of market power held by companies in an industry. Applied to a parliament, the index adds up the squared shares of the seats held by the parties; higher values indicate more concentration of power. Here is how the index evolved in southern countries that imposed austerity after the global financial crisis began in the fall of 2008 (where applicable, the lower house of parliament is measured):
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