Skeptics See Euro Eroding European Unity

11/11/2013

Europe’s slow emergence from its second recession in the last five years is raising new questions about whether the euro currency is doing more harm than good.

 Five years of crisis have laid bare deep differences in national policies, politics and priorities across the European Union. The 28-member bloc is increasingly confronting a more fundamental problem: whether it is too unwieldy to address the multiplying array of challenges it faces. And in many ways, the most divisive issues involve the 17-member subset of the union that was supposed to give them something in common — the euro currency.

The notion that the European Union has structural deficiencies has been debated almost since its founding. The tension between economic integration and political harmonization is nothing new. But as the global financial crisis is beginning to fade, Europe’s troubles persist, exacerbated by the fissures of the currency union that have impeded the region’s economic recovery.

“My worst fears are confirmed,” George Soros, the Hungarian-born former hedge fund titan, said in an interview.

“This is what I was afraid of, that the euro would be preserved and it would pervert the venture and destroy the European Union,” he said. “Instead of the solidarity that was supposed to be embodied, it became every country by itself.”

The strains are evident at many levels. Hopes for greater political cooperation are falling victim to domestic economic stress in many countries and the rise of populist politics heading into European parliamentary elections next spring. An interest-rate cut by the European Central Bank last week reportedly came over the objections of the German members of the bank’s governing council.

And there are deep divisions within the European Union over a plan to unify the process for identifying and closing down troubled banks — and paying the costs of doing so. Those disagreements could get a further airing this week when euro zone finance ministers meet in Brussels.

The core of the trouble, critics say, stems from the structure of the euro currency union. Unlike a single-currency country like the United States or Britain, it lacks a common treasury and the ability to issue common debt. That has created a poisonous dynamic between creditor nations, like Germany, and debtor nations, like Greece.

True, there have been glimmers of good news lately. Consumer confidence among Europeans has improved, and recession has ended in countries like France and Spain. European stock indexes are up for the year. And yes, the euro in recent months has risen in value against other main currencies — although that is more curse than blessing, because it makes exports relatively more expensive outside the euro zone.

But the big worry lately is the specter of deflation, a doom loop of falling prices, wages and profits that, once underway, is a tailspin hard to pull out of. The fear of years of stagnation was the main impetus for the European Central Bank’s decision to reduce interest rates, over the objections of Germany, which worries that looser money will only encourage profligacy by its weaker euro neighbors.

It is not evident, though, that anything has been gained by the austerity policies that Germany long preached, which have been a drag on economic growth; government debt in the euro zone has risen sharply over the last half decade.

Perhaps worst of all, the various economic afflictions have reinforced the kind of nationalism and xenophobia that the broader European Union project was supposed to chase away.

Nicholas Spiro, founder of a London economic consultancy, said that Europe was “stuck in a halfway house between a shaky and ill-managed monetary union and a more secure economic and political one.” The risks are increasing of “one of these countries’ politically imploding,” Mr. Spiro said.

Fabrizio Saccomanni, the Italian finance minister, said in a speech last week that the European Union needed to have a philosophical reckoning of sorts, as his country prepares for a stint next year holding the six-month revolving presidency of the union.