Wall Street Journal
November 7, 2011
"Six weeks to save the euro," European leaders promised the world in September. That deadline passed at last week's Cannes G-20 summit with the goal looking further away then ever. Nothing of substance was agreed on the French Riviera to aid the cause of euro survival, but one giant decision was taken that could hasten its demise. Angela Merkel and Nicolas Sarkozy's announcement that Greece is free to leave the euro has transformed the nature of the euro.
The United States fought a bloody civil war in the nineteenth century to stop states seceding from the union. Yet the German and French leaders have decided the euro zone will be a voluntary union, not because of an attachment to the principle of national self-determination but to protect the principle that euro-zone countries should not become liable for each other's debts.
The significance of Ms. Merkel and Mr. Sarkozy's Cannes declaration is immense. At a stroke, they have introduced foreign-exchange risk into a sovereign-debt market still grappling with the realization that euro-zone government bonds contain unexpected credit risk. Worse, throughout the crisis, the two leaders said they will do whatever it takes to save the euro. Yet the assurances they've given haven't been worth the paper they were written on: First, there were to be no sovereign defaults; then the first Greek haircut was a "unique situation;" the second Greek haircut followed 12 weeks later; now euro-zone exits are possible. No wonder the markets won't lend and China won't invest in Europe's bailout funds. Nothing these leaders say any longer carries any credibility.
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