Europe's Choice

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Michael Probst / AP

Domino effect Greece may just be the beginning

Last week, Greece was rescued with a package worth €110 billion ($146 billion) — for the time being. That's a lot of money. Yet in the greater scheme of things, the Greek economy is just a "hill of beans," to borrow from Humphrey Bogart in Casablanca. The momentous question is whether the euro will survive.

Journalists should only quote others, so please forgive this author for a little self-indulgence. In 1997, I wrote an essay in the New York Review of Books titled "The Euro: The Engine That Couldn't." It laid out the current crisis by way of metaphor: a common currency without a common government is like "several locomotives, each running under its own power, strung together to make up a single train. Each engine must steam ahead at the same speed in the same direction at the same time." Unless all the engineers behave as one, "the couplings will break," or the "locomotives will go off the rails."

That rosy assumption of "all together now" was the deadly flaw of the single-currency project. By plunging into the euro, Europe put last things first, and it is a miracle that it took a decade before the wheels started to screech. All those engines (states) had their own engineers (governments), and they came with different interests and cultures. The Germans obeyed strict fiscal discipline, the Italians had grown fond of inflation and a sinking lira. The Dutch liked free trade, the French preferred state intervention. While German exports soared, Europe's southerners lost competitiveness, paying for their lifestyles with ever more debt. And all of this without the safety valve of devaluation.

Of course, Greece was not supposed to happen. The so-called stability pact enjoined all members to stick to fiscal virtue — to keep deficits and debt down. Alas, the governments all had different fish to fry — like winning elections. Worse, the system encouraged irresponsibility, for suddenly profligates like Greece paid the similarly low interest rates as their northern cousins. So they happily went into hock, and now the bills have come due.

There are only three ways out: 1) the sinners mend their ways; 2) the better-off keep paying; 3) the worst offenders decouple, go into default and thence into brutal devaluation as did Argentina in 2002 — a nation that had previously chained itself to the dollar in a one-way monetary union.

With the rescue package of this month, Europe has gone for options 1 and 2 — for the heavy hand of austerity and the soft heart of ยค110 billion in emergency loans. When the markets reopened on May 3, they were unimpressed, continuing to short the euro. The traders may have remembered Argentina. The country was given several injections of assistance only to default in the end, with creditors getting just a fraction of what they were owed.

Greece, to be sure, is a small economy, about one-tenth the size of the German one, so other Europeans can afford to keep Greece on track even if its government will not risk death by pleasing its creditors. But Greece is just the most egregious problem. Next in line is Portugal, followed by Spain and Italy — and these latter two are economies of real size. All of which implies a fourth solution, which should have been imposed in 1999 when monetary union took off: a system of economic governance that keeps speeds and timetables in sync.

Logically, this is the only way to prevent future Greeces. But logic is not the same as politics. Whose rules would govern such a system? Germany's, with its insistence on fiscal discipline? Or those of France, which demands more vice from the Germans, that is, to sacrifice their export surpluses by stimulating domestic demand and letting wages creep up? "Slow down so that others may keep up" is not a slogan that will go over well in Merkel Land.

Europe will not choose a single engineer to run the entire train. It will continue to muddle through. That is not necessarily a disaster, but rather the way Europe was built, with disaster followed by renewal. So the Greek calamity, which is far from over, may be a salutary wake-up call. You can't have monetary union without a system of supervision and crisis-control. The E.U. has known what Greece and others have been doing for years, but it chose not to notice, let alone to intervene.

So Europe might use the time afforded by the emergency loans to install a rigorous early-warning system — just as banks do when their clients abuse their overdraft privileges. It should be flanked by a mechanism for an orderly default that keeps contagion from spreading. The worst of all possible worlds is a panicky default after a few more rescue packages have sunk in the Aegean. It will be a lot more expensive, and the run on the euro may turn into a stampede.

Joffe is editor of Die Zeit and a fellow of the Institute for International Studies and of the Hoover Institution at Stanford University