Saving the euro, saving Europe

Financial Times
Editorial
July 18, 2011

Early this year, Europe’s policymakers portrayed their struggle to contain the sovereign debt crisis as a difficult, but not insurmountable, challenge. If intelligently handled, it could be confined to the small economies of Greece, Ireland and Portugal. As for the rest of the eurozone, a judicious mixture of fiscal austerity measures, economic governance reforms and light revisions to the European Union’s governing treaty would do the trick.

Now it is obvious that the battle for the euro is entering an altogether more dangerous phase. Italian and Spanish government bond yields rose again on Monday to their highest levels since the euro’s launch in 1999. So did the premiums that investors demand to buy Italian and Spanish debt rather than top-quality German bonds. “Decoupling”, or the notion that Italy and Spain have inoculated themselves against contagion from Europe’s outermost nations, is being ruthlessly exposed in debt markets as an illusion.

Yet Italy and Spain are the third and fourth biggest countries in the 17-nation eurozone, accounting for more than 28 per cent of the area’s gross domestic product. Add the six per cent represented by Greece, Ireland and Portugal, and the startling realisation dawns that, measured in terms of economic output, financial markets are raising concerns about the creditworthiness of more than one-third of the eurozone. The risks to the European banking system, with its intricate patterns of multibillion-euro, cross-national loans and investments, are correspondingly high.

As a result, there is nothing to be gained from maintaining the pretence that the survival of Europe’s monetary union in its present form is not under threat. Yet the implications of this crisis are even more profound. The euro stands as the crowning achievement of the post-1945 project of European political and economic integration. Remove this pillar and there is no saying what may happen to the rest of the architecture, as well as to the EU’s influence in the world.

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