The first part is easy. The euro, at this point, is a broken currency:
For the carry traders, it’s a chart of what the Bataan death march looks like.
Then, there’s this report, courtesy of the intrepid journalism of the Sunday Times:
The tension between Germany and France threatened to spill over at a Brussels summit last weekend when Merkel and Sarkozy had a furious row. According to observers, it ended with Sarkozy threatening to leave the euro.
“It was a stand-up argument,” an official told El Pais, the Spanish newspaper. Sarkozy, furious at Merkel’s reluctance to sign up to a safety net of €750 billion (£644 billion), was shouting and bawling at Merkel and smashed his fist on the table. “It was Sarkozy on steroids,” one witness said.
France and Germany, the two biggest countries and economies on the continent, having it out – literally – in Brussels. It’s easy for Sarkozy to demand that Merkel put her money where his mouth is. It’s her money. And he doesn’t have to face a screaming, jeering chorus of anxious Germans who are deathly afraid of inflation, besides.
Then there’s the various tensions David Ignatius noted in his WaPo piece. First, between the savers and spenders:
The problem with the European package is that it postpones problems rather than resolves them. It will delay Eurobond defaults another year or two, and it will add some fiscal discipline that could eventually make the 16 eurozone nations operate more like one economy.
But there’s nothing to address the deeper structural imbalances between high-saving northern Europe and the spendthrift “Club Med” countries of southern Europe that used the euro as a credit card. Basically, the north’s abundance created a low-interest Eurobond market that underpriced the risk of investments in the south.
Then of course, there’s the tension between governments and the people:
But the austerity measures have two big drawbacks, one economic and the other political. The economic problem is that imposing harsh budget cuts and other belt-tightening on the “Club Med” countries, while appealing to German workers, may not make sense when the European recovery is so fragile.
The trickier problem is building political support for the austerity measures that are coming. Looking at Greek rioters chanting about demon bankers and government ministers who threaten their pensions is a reminder that Europeans believe in the welfare state as a matter of social entitlement. A different social contract may need to be written, more in line with economic and demographic realities. But that won’t be any easier in Europe than in the United States.
This seems to be very much a conflict between the governors versus the governed, the haves versus the have-nots.
So suffice it to say, the EU model of a single currency to be used by many countries that have differing views on government, government spending, and as a result, differing credit risk profiles, doesn’t work. Things may have been very different had the EU put the principles of fiscal conservatism ahead of the goal of getting the Euro-zone started on time, nixing requirements to restrict deficit spending and other requirements all for the sake of achieving a timeline.
But now we see it was never going to work. Not with flimsy governance, no enforcement of Maastricht Treaty rules and the like.
The bomb has already gone off. Yet the Eurozone leadership is still trying to defuse it…