(http://www.businessweek.com/magazine/content/10_50/b4207011595263.htm?campaign_id=magazine_related)
The euro zone—born of cultural similarity—is threatened by its economic inequalities. It doesn't have to be
By Peter Coy
In December 1998 and January 1999, high-energy physicists in Russia created a superheavy element called ununquadium with a record 114 protons. It was an impressive technical achievement. Alas, ununquadium ("oon-oon-QUOD-ee-um") is too unstable to exist in nature. The force binding its nucleus together is overwhelmed by the force tearing it apart. The synthetic element has a half-life of just 2.6 seconds.
At the very moment that the physicists in Dubna, Russia, were birthing ununquadium, another group of scientists—dismal scientists—were smashing together the currencies of Western Europe to form a brand-new synthetic element known as the euro, which they proudly launched on Jan. 1, 1999. Less than a dozen years later, the euro is under serious strain. "European officials have squandered...confidence, and like toothpaste coming out of a tube, it is difficult to put it back in," writes Marc Chandler, global head of currency strategy at Brown Brothers Harriman. Some agonizing questions are being openly asked. What will it take to restore monetary stability in Europe? Is the euro, like ununquadium, simply too massive for the natural world? If so, how might it blow apart—and how much damage might it do in the process?
What's so concerning to European policymakers is that the conflagration keeps jumping over their firebreaks. Sovereign borrowing costs kept rising after the announcement on Sunday, Nov. 28, of a tentative €85 billion emergency loan package for Ireland. It's not even clear that the Irish legislature will agree to take the money on the terms offered. "The plan should have been announced in Lourdes because, short of a miracle, it is doomed to failure," says Jack O'Connor, head of SIPTU, Ireland's biggest union.
Back in 1999, at the euro's launch, hopes were high that Europe would cleanse itself of its warring past as efficiently as it dispensed with historic currencies like the peseta, franc, guilder, and deutsche mark. Speakers harked back to Winston Churchill, Britain's wartime Prime Minister, who in 1948 said: "We hope to see a Europe where men of every country will think of being a European as of belonging to their native land, and...wherever they go in this wide domain...will truly feel, 'Here I am at home.' " If anything, the opposite is occurring. The euro coin has become a millstone to many, and forced togetherness is reviving prejudices between nations.
Sovereign debt crises aren't new. Greece was in default on foreign debt for 90 of the years between 1826 and 1964, according to economists Carmen Reinhart and Kenneth Rogoff. What makes this crisis a threat to the euro's solidity is that the common currency is impeding member nations' ability to get back on their feet. Ordinarily when a nation like Greece or Ireland loses competitiveness, it gets it back by allowing its currency to depreciate—its exports automatically become cheaper to foreign customers while imports become more expensive, which discourages consumers from buying so many of them. Iceland regained competitiveness when its krona abruptly lost half its value in 2008. Since the euro zone's weaker members can't depreciate, the only way for them to regain competitiveness is to cut pay and benefits. That's "a very much more painful way to achieve real devaluations," Martin Feldstein, the Harvard University economist and former chief economic adviser to President Ronald Reagan, wrote in a June article in The Weekly Standard. (Feldstein, not incidentally, was warning about the euro's drawbacks in 1999, when many other economists were all smiles.)
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