Wall Street Journal
October 25, 2011
Decisions taken over the coming week will define Europe's destiny for generations.
For the past 60 years, the European Union in its various guises has helped to ensure peace and prosperity. Central to this project has been the relationship between France and Germany: the creation of the European Coal and Steel Community in 1956, which began this process of integration, was designed to bring to an end to nearly 100 years of Franco-German conflict that had seen Paris twice occupied by Germany and Germany brought to its knees by the Treaty of Versailles in the wake of World War I.
Now the euro crisis is putting new strain on the relationship. Unless France and Germany can find a way to resolve those differences over the next few days, both the euro and the European Union itself could start to unravel—a terrifying prospect.
For the past year, tensions between France and Germany have hampered a decisive response to the euro crisis. At issue is who should bear the ultimate losses should a euro-zone government become insolvent. Germany believes those losses should be borne by euro-zone government bondholders, bank shareholders and the citizens of the countries that ran up the debts. France argues the damage to euro-zone credibility from failing to stand behind its governments and banks will ultimately cost taxpayers far more than supporting them with bailouts and liquidity facilities, including access to the unlimited firepower of the European Central Bank's balance sheet. The situation is complicated by the ECB itself, which agrees with France that sovereign defaults will trigger contagion and slump, but concurs with Germany that providing profligate governments with a blank check will fuel moral hazard.
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