Published for www.washingtonpost.com, May 17, 2012
Europe’s economic struggles are a consistent drag on American growth. A eurozone breakup, in chaos and acrimony, could be a Lehman-like shock of incalculable damage.
For years, the stronger European economies have managed to bump along from challenge to challenge — providing bailouts to the improvident in exchange for fiscal restraint and reform, while reassuring credit markets in an elaborate confidence game. But the fundamental problem has never been resolved. Europe is a monetary union without being a fiscal union. Germany has become the continent’s rich uncle, vouching for the credit and covering the debts of distant relations without authority over their spending habits.
German patience with this arrangement is now being tested by Greece. It would be possible for Europe to maintain Greece — just 2 percent of the continent’s economy — as a permanent dependent. Greece could default within the euro zone and have much of its debt written off.
But Greece is a living, breathing moral hazard. What message would it send to Italy, Spain, Ireland and Portugal — all undertaking difficult austerity programs — if the European Union provided special treatment to its least trustworthy member? Many Germans believe that Greece entered the E.U. in the first place on the basis of false economic figures. Should German taxpayers now assume permanent responsibility for a political system apparently incapable of responsibility? The birthplace of democracy seems to lack a working one.
So Europe seems to be preparing for thedeparture of Greece from the euro — kicking the dependent out of the house to live on his own. For many months, German and French banks have been quietly offloading Greek liabilities. European finance ministries are beginning to plan for an event with no legal precedent or procedure.