Mort Zuckerman: Can the Eurozone Survive?

Banks are collapsing, and over-indebted governments are running out of both money and credit.

European Commission in Brussels, Belgium

Europe stands on the edge of an abyss, its most dangerous financial crisis since the 1930s. Greece, Spain, and Italy are the closest to tumbling over, but all the others in the eurozone are roped together like Alpine climbers, the fall of one threatening to bring down the rest. And the drag on the rest of the world, very much including the United States, would be calamitous. Say au revoir to our faltering recovery.

The facts of the eurozone showdown are brutally simple. Growth is stalled, even in the most successful member, Germany, and in many countries it is contracting. Unemployment is high and soaring; today Spain's unemployment rate is some 24 percent. Banks are collapsing, and over-indebted governments are running out of both money and credit.

The agreement of a number of countries in 1999 to create a single legal currency, the euro, was the most ambitious project of the European Union of 27 nations. The nations embracing the euro saw it as a way to free trade, travel, and labor mobility. The eurozone made a dazzling debut and now includes 17 nations. Money poured into Spain, Greece, Portugal, and Italy. The common conviction was that by having a single currency, the nations of the eurozone would somehow converge—that the spendthrift Greeks, Spaniards, and Italians would become parsimonious, disciplined Germans. This basic assumption that all countries were henceforth equally creditworthy was proved an illusion by the financial crisis of 2008. After 2008, capital flows suddenly stopped in the very nations that had boomed before. They then had to rely on their own devices without the ability to devalue their currency. The internal economics of these various European countries were thus starkly revealed. Germany's unit labor cost over the period of the last decade has declined by 3 percent. In contrast, the unit labor cost in France, Greece, and Spain went up by over 20 percent, and in Italy it rose by over 40 percent. Labor markets remained more national than continental, making them responsive to powerful unions and inefficient working and wage-setting systems that allowed labor costs to soar. What this means is that products from these countries cannot be made competitive, since the countries now lack their former ability to lower the price of their exports by devaluing their drachmas, pesetas, and liras. If each had a variable currency instead of sharing a single currency, they would have to decline their currencies dramatically in order to restore the competitiveness of their home products. Currency declines would then have been on the order of as little as 10 percent and as much as over 20 percent.

[See a collection of political cartoons on the European debt crisis.]

The structure erected in 1999 stopped short of a fiscal union; it was rather like building a fine house but neglecting to add a roof for stormy weather. The fundamental flaw of the EU was to pursue a monetary union without a fiscal, economic, or political one. Member nations would agree on common interest rates and inflation targets, but would still decide individually how much to tax their citizens, what welfare and pension benefits they would pay, and what their employment policies would be. Today a German worker retires five years later than a Greek, so Germans ask why they should be paying part of their hard-earned incomes so Greeks can work less. No wonder most Germans fiercely oppose bailing out Greece. Meanwhile, the French do not agree to scrap the EU's generous farm subsidies. What they do have in common is a reluctance to accept high taxes as the price they must pay for cradle-to-grave welfare services. They like their holidays and their lengthy lunch breaks, but unlike the United States, they do not identify with the political construct that has been created in their name, namely the European Common Market (ECM).

The consequent financial insolvency, economic fragility, and political instability is reflected in the fact that seven European leaders of ruling parties have already been forced out of office because the one-size-fits-all austerity measures to meet national debt payments have been deeply unpopular. Spain has had its demonstrations, but not to compare with the violence in Greece. The deputy prime minister, Soraya Sáenz—dubbed the most powerful woman in Spain—told Reuters: "It is not possible to explain to citizens that what they save through austerity will then be spent on higher debt interest payments."