German businesses could steer the country out of the eurozone

German businesses could steer the country out of the eurozone
By Howard Schneider
Copyright by The Washington Post
Saturday, June 5, 2010
http://www.washingtonpost.com/wp-dyn/content/article/2010/06/04/AR2010060404815.html?hpid=topnews


FRANKFURT -- Must Mattheus Schneider's ice cream shop bear responsibility for the future of Greece?

With the euro fighting a crisis that continues to push its value lower, that question about the willingness of German taxpayers and businesses to stand behind economically weaker nations with which they share the euro as a currency could determine whether the continent's decade-old monetary union survives its recent shock or begins to tatter.

Germany's political leadership has pledged the country's credit to back a bailout of Greece as well as a separate nearly trillion-dollar fund to help other countries, but the larger issue of shared responsibility within the eurozone remains to be joined -- and will be central to the future of an area considered one of the pillars of the global economy.

Sharing a currency with Greece is one thing. But sharing a future is another, and Germany's expanding commitment to the eurozone has many here wondering how their own financial plans -- Schneider hopes to turn his Dulce store into a franchised chain -- could be damaged if Europe's problems become too draining and drag down the local economy.

"Even if they ruin [the euro], Germany runs a stable country," said the young German entrepreneur, who said Germany has benefited from the euro so far but should be ready to pull out and reinstate the Deutschmark. "We'll always be able to get loans."

Approval of the bailout programs, coordinated with the International Monetary Fund, has given Greece breathing room to restructure its economy, but the euro had already dropped sharply over concerns that several eurozone governments had accumulated unsustainable levels of debt. Despite the rescue programs, the euro on Friday fell below 1.20 for the first time in four years amid continued concern about government debt and mistrust that eurozone countries will address the region's problems.

The currency union

A more foundational debate lies ahead over the structure of the currency union -- the degree to which the countries are responsible for one another, and the power that central institutions like the European Commission have to enforce common rules. The crisis over the euro began when Greece revealed that it had accumulated debts far beyond the level eurozone countries agree to meet when joining the currency group, a fact that prompted Germany in particular to argue that any bailout needed to be followed by more rigorous rules and better enforcement.

German Chancellor Angela Merkel and French President Nicolas Sarkozy, heads of the two largest and most influential eurozone nations, are set to meet next week to continue talks that could see eurozone countries asked to cede some powers, face investigative oversight by a central statistics agency, and encounter financial and political sanctions if they fail to meet spending and budget limits.

Angelos Pangratis, acting head of the European Union's delegation to the United States, said in a recent presentation that it was "naive" to think that countries like Greece and Germany could not co-exist in a common currency area and that there is broad confidence in the currency zone's survival. But he acknowledged that over the euro's first decade there had not been the "convergence of competitiveness" that eurozone architects thought would even out wages, growth rates and other key variables across the countries involved and help prevent problems like the one that occurred in Greece.

"When we created the euro, we knew there were two conditions," Pangratis said. "You need fiscal responsibility . . . and we must have a convergence of competitiveness."

Instead, the first years of the euro were marked by divergence. Some countries, particularly in the south of Europe, enjoyed lowered interest rates that fueled an economic boom, pushed up wages and contributed to asset and price bubbles that are now being painfully corrected. Some governments borrowed well beyond their means.

It was a risk identified early on.

"The euro is a currency without a foundation in a state," then-IMF managing director and future German president Horst Kohler said in 2001, two years after the euro's inception. That, he said, left a "question mark" over the future of the currency unless it could be "underpinned by greater political cohesion among member states."

Short of 'optimal'

On some fronts, the euro remains short of what economists would regard as an "optimal currency zone." In the United States for example, wide differences in wage and growth rates among states would prompt people to migrate from less prosperous areas, a fluid movement of labor aided by a common language and culture. The movement of labor is not as dynamic among the nations of the eurozone. Where the United States' large federal budget and common federal regulations can help even out economic differences among the states -- areas with large numbers of children from poor families, for example, would receive more in federal school lunch subsidies -- the European Union's central budget is tiny by comparison and not used in the same way.

It has taken a decade, but the implications of that design weakness are now on full display, from the budget cuts and possibility for social turbulence in Athens and Madrid, to the skepticism often encountered among Germans.

There is still a conviction here, for example, in a nation preoccupied with the dangers of inflation, that the original conversion from the Deutschmark to the euro led to a rise in price, a point that economic studies have refuted but that remains a point of anecdotal faith for people quick to recount how a candy bar that cost one and a half marks suddenly cost the equivalent of two marks after the euro was introduced.

In Athens, the focus is on outside powers -- a hazy cabal of the IMF, international bankers and the government in Berlin -- clamping down on the Greek government for what are perceived to be their own purposes. In Madrid, powerful labor groups have threatened a showdown over recent public wage cuts.

Few think the currency union will break up over such tensions. But it does mean that some long-standing issues may finally have to be addressed.

"Everybody knew the situation. Everybody participated. Everybody made money," Vassilis D. Kaskarelis, Greek ambassador to the United States, said in a recent talk to the Greater Washington Board of Trade. "Now it is time to pay the bills."