NCPA - National Center for Policy Analysis

The Euro End Game

May 22, 2012

Europe has pursued repeated rounds of fiscal austerity and bank deleveraging in exchange for loans that were supposed to save the euro.  The result has been a predictable recession with plummeting employment, incomes and prices, says John H. Makin, a resident scholar with the American Enterprise Institute.

The immediate result of this debt crisis is an increasingly radical political climate, pitting pro-euro politicians like Germany's Angela Merkel against anti-euro figures such as France's new president Francois Hollande and the current administration of Spain.

The backlash against euro-saving austerity measures isn't just political: it is manifesting itself in the economic policies of the heavily indebted countries.

  • The Netherlands' conservative government has collapsed as austerity intensifies an already painful recession.
  • The Spanish government has refused to impose the degree of fiscal austerity called for by the recent agreement to save the euro, recognizing that it cannot possibly reduce its deficits by the agreed amount.

Put simply, the primary measures that have been put into place to save the euro have intensified the pain of the recession, and have resulted in popular movements against the euro, manifesting in the elections of explicitly anti-euro politicians.

Looking forward, European leaders need to begin contemplating the long-term future of the euro and the European community at large.  This entails a distinct decision: will Germany double down on European cooperation and save the community, or will it allow the eurozone to fall apart?

  • Germany will have to allow debtor nations to borrow its credit-worthiness to preserve the euro.
  • To this end, there will have to be greater movement toward a unified fiscal policy that is determined by the European community as a whole, allowing Germany to reign in the debt-tilted tendencies of Spain, Ireland and southern Europe.
  • It would also require European bonds to replace the bonds currently issued by each separate government.

The pain involved in creating this sort of cohesion may be too much for the Germans to accept.  Yet it is undeniable that the euro is coming to a crossroads soon, and a fundamental decision will have to be made.

Source: John H. Makin, "The Euro End Game," American Enterprise Institute, May 2012.

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