Does the Euro Have a Future?
The euro crisis is a direct consequence of the crash of 2008. When
Lehman Brothers failed, the entire financial system started to
collapse and had to be put on artificial life support. This took the
form of substituting the sovereign credit of governments for the
bank and other credit that had collapsed. At a memorable meeting
of European finance ministers in November 2008, they guaranteed
that no other financial institutions that are important to the
workings of the financial system would be allowed to fail, and their
example was followed by the United States.
Angela Merkel then declared that the guarantee should be exercised
by each European state individually, not by the European Union or
the eurozone acting as a whole. This sowed the seeds of the euro
crisis because it revealed and activated a hidden weakness in the
construction of the euro: the lack of a common treasury. The crisis
itself erupted more than a year later, in 2010.
There is some similarity between the euro crisis and the subprime
crisis that caused the crash of 2008. In each case a supposedly
riskless asset—collateralized debt obligations (CDOs), based largely
on mortgages, in 2008, and European government bonds now—lost
some or all of their value.
Unfortunately the euro crisis is more intractable. In 2008
the US financial authorities that were needed to respond to the
crisis were in place; at present in the eurozone one of these
authorities, the common treasury, has yet to be brought into
existence. This requires a political process involving a number of
sovereign states. That is what has made the problem so severe. The
political will to create a common European treasury was absent in
the first place; and since the time when the euro was created the
political cohesion of the European Union has greatly deteriorated.
As a result there is no clearly visible solution to the euro crisis. In
its absence the authorities have been trying to buy time.
In an ordinary financial crisis this tactic works: with the passage of
time the panic subsides and confidence returns. But in this case
time has been working against the authorities. Since the political
will is missing, the problems continue to grow larger while the
politics are also becoming more poisonous.