Twenty odd years ago, three giants of European politics — Edward Heath, Giscard d’Estaing and Helmut Schmidt — came to address students at the LSE on the issue of a single currency for Europe. Each of them had been in charge of their respective country — the UK, France and Federal Republic of Germany. They strongly argued the case that Europe would be better united if it had a single currency. At the lunch later, I asked Helmut Schmidt why he wanted the strong German Deutschmark to be merged into a single currency which was bound to be less stable. His answer was stunning. He told me if the Deutschmark stayed as powerful as it was, Germany would be the hated country of Europe once again. It was important for Germany to bury the Deutschmark under a European currency.
Last week, as the negotiations for the Greek bailout climaxed, one could say that Helmut Schmidt had failed in his gamble. Angela Merkel was once again the target of much anger throughout Europe for what many thought was a cruel and heartless negotiating stance. People began to talk of the subjugation of Greece. Indeed the condition that Greece put 50 billion euros worth of its public assets under European control told us of the severe limitations on Greek sovereignty. Ironically, people recalled how the Treaty of Versailles had been imposed on Germany after the First World War, an unbearable burden of reparations for the guilt of having started the war and lost it.
German nation got distorted into Nazism and the Second World War was blamed on the injustice of reparations. Here there was Germany taking the lead in imposing an unbearable burden on Greece, a country it had tried to conquer during the Second World War, encountering much resistance.
This was not how the European Union was meant to be. It was built on hopes of solidarity and democratic, liberal freedoms. The point of introducing a single currency was to bring the countries together in an “ever closer union”. From a single currency was to come a single Federal Europe. It would be prosperous, and integrated. Europe would forget its violent past with nationalisms fighting each other for territory. It was to be a haven of peace.
The Euro experiment was a success to begin with while the world was flush with easy credit. But since 2008, the money has dried up. The Eurozone is modelled on the Gold Standard and nations have no control over their money supply. They also cannot run budget deficits. The exchange rate being common, no country can devalue its currency against others. If debts have to be repaid, the only answer is to squeeze the living standards or increase efficiency by cutting wages and raising productivity.
The experiment was fraught with problems as many people had warned. A monetary union without a fiscal union does not allow the transfers of income from the strong to the weak. Imagine India without the Finance Commission being able to lay down formula for transfer of revenue from the Centre to the states. How would Bihar fare while Haryana prospered? Now think of Germany and Greece.
Northern European nations have strong economies and are used to fiscal discipline. They have done well out of the Euro. Southern European nations liked their freedom to depreciate the currency to boost exports. Portugal, Italy, Ireland, Greece and Spain (PIIGS) have suffered. They got into debt when borrowing was easy but can’t pay back. Greece has suffered the most. It had a very lax
tax-collecting authority and, rather like India, a lot of transactions are in cash. Many people work in the government and retire early.
Greece can be locked up into 40 years of deflation as it pays off its debt, currently 200 per cent of its GDP. Negotiations could yet fail. Greece could exit. It could renounce its debts, re-adopt the drachma and devalue. It will not be able to borrow but it can get by printing its money. It may even exit the European Union. That will be the beginning of the end of the Union.