Bending the rules of euro management, European leaders and finance ministers agreed to an unprecedented effort to guarantee the stability of the eurozone with loans adding up to nearly $1 trillion (or €750 billion) this weekend.
In spite of the multibillion euro rescue package previously pledged to Greece, investors continued to worry about the unsound fiscal policies of other eurozone members, including Ireland, Italy, Portugal and Spain. The value of the euro sharply decreased in recent days while protests in the streets of Athens last week shed further doubt upon the country’s chance to recover — and pay back its loans.
The Northern European states, Germany foremost among them, have been reluctant to come to Greece’s aid, noting that for many years the country not only violated European budget rules but covered up its fiscal woes with ingenious but fraudulent schemes. Chancellor Angela Merkel had to face electoral defeat in Germany’s most industrial of states on Sunday after agreeing to the Greek bailout nevertheless.
Initially, the €750 billion stabilization package, a joint effort of the European Commission, individual eurozone states and the International Monetary Fund, seemed quite able to vanquish concerns about Europe’s looming sovereign debt crisis but already, doubts are surfacing over how much the deal can really do to solve the underlying problems.
While the European Union may have to move toward financial centralization in the near future — something surely welcomed by the French who still dream of greater economic government from Brussels — there is talk in the northern countries of either abandoning the euro or forcing those countries in trouble to give up the common currency.
During Sunday night’s negotiations over the €750 billion plan, a divide between north and south readily developed. Britain, Germany and the Netherlands opposed the European Commission’s original proposal to raise money on capital markets guaranteed by member states. The British and Dutch complained that it would be tantamount to giving a “blank check” to the EU’s executive. Austria and Finland expressed similar concern over centralizing too much control in Brussels.
France and Italy argued for an all European effort instead. The two countries previously wanted to keep the IMF out of the Greek bailout, with Italian prime minister Silvio Berlusconi complaining that if Europe failed to deliver, it had no right to exist whatsoever. French president Nicolas Sarkozy has been a staunch proponent of greater economic integration within the EU and was reportedly pushing for a bigger deal all through Sunday evening.
An agreement was finally worked out between the Dutch, the French, the Italians and one German banker, Axel Weber, the president of the Bundesbank who is favored to succeed Jean-Claude Trichet as head of the European Central Bank. He proposed a mechanism for Europewide loan guarantees that ultimately won support from the German government. The European Commission would manage the vehicle but not control it, in conjunction with the IMF to provide discipline as well as additional funds.
The euro is saved for now but still needs new rules to prevent the fiscal irresponsibility of some members from ever threatening the stability of all participating countries again.
A North European euro seems unlikely as does forcing Mediterranean countries out of the eurozone. Finland, Germany and the Netherlands have profited immensely from both the internal market and the common currency after all. These are export driven economies that sell most of their goods to fellow European states while their financial institutions invested dearly in the southern economies. No matter today’s resentment with people who rightfully complain that their tax money is used to bail out Greeks who retire fifteen years ahead of them; the euro is still a success story that no one in their right mind should want to abolish.