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This artwork by Nancy Ohanian relates to European countries' attempts to save their currency.
Sunday, June 23, 2013
On June 5, the European Commission endorsed the Latvian application for inclusion in Europe’s Economic and Monetary Union. Latvia, a small country of nearly 2 million people nestled in the Baltic region of Northern Europe, will become the 18th member — a feat quite remarkable for its timing.
In the years since the global financial crisis first spilled over into the eurozone, the future of Europe’s common currency has appeared uncertain, prompting some observers to predict its collapse. In light of the monetary union’s recent history, punctuated by sluggish growth, rising unemployment and popular discontent, there is reason to doubt the prudence of Latvia’s decision to charge into the fray.
The eurozone crisis intensified in late November 2009, when the Greek economy collapsed under the weight of its spiraling sovereign debt, validating pre-existing concerns over Greece’s readiness to embrace the obligations of membership. During the ensuing months, reforms were ineffective, leading to widespread domestic unrest and growing anxiety among the euro-partners. At first, it appeared unlikely that Greece would receive assistance when German Chancellor Angela Merkel refused to consider the idea until Greece’s debt was more firmly under control. Merkel’s position made matters worse by increasing speculation against debt-reduction efforts. By May 2010, the writing was on the wall, and EU finance ministers, in conjunction with the International Monetary Fund, negotiated a bailout.
The Greek crisis put the euro under tremendous strain — and not simply in the markets. The travails surrounding the negotiation of the bailout revealed divisions over the extent to which profligate countries should be secured by fiscally responsible members. Germany, in particular, appeared torn between making an example of Greece and intervening on its behalf. Germany’s reluctant support of the Greek bailout hardly sent a convincing message that any future crises would be met with a strong, united front.
Unfortunately, the dominoes continued to fall. In the summer of 2010, Ireland and Portugal came under pressure and, once again, fears arose that assistance might not be forthcoming when Merkel suggested that losses in their banking sectors should simply be absorbed. While Ireland and Portugal would receive bailouts, predicating circumstances did little to relieve tensions over fiscal irresponsibility or resolve questions about the euro’s future. Most recently, Cyprus has captured headlines as the latest to require assistance. Negotiations proved to be quite controversial, and the terms of the bailout, finalized in March, will require the Cypriot government to implement unpopular austerity measures.
On the whole, the impact of the eurozone crisis is profound, revealing much about the incongruence between politics and economics. While the euro founders sought to put into place formal restrictions to ensure greater economic and political alignment, the enthusiasm to bring the euro into fruition encouraged authorities to overlook the fragility of measures adopted by countries hoping to qualify. Meanwhile, the relative prosperity of the European economy postponed the costs of fudging the numbers and relaxing fiscal restraint. The global financial crisis has since exposed the true nature of policies impacting government spending and debt, unmasking spendthrifts and forcing them to literally pay the consequences.
We simply do not yet know whether the reforms put into place will work — and whether the governments implementing austerity measures will have the courage or support to maintain them. The euro-crisis has already proven to be a game changer on the domestic level, encouraging firebrands to lambaste the harsh conditions of the bailout packages. Yet, even as governments have fallen in the wake of the crisis, their replacements have proven to be pragmatic. This bodes well for Europe’s turnaround, but everyone should be prepared for a long, slow recovery marked by hard choices and an occasional challenge within the courts.
It is unlikely that the euro will collapse or that less-well-off members will be forced out. Though Germany’s position throughout the Greek and Irish crises complicated matters, current eurozone members have demonstrated real commitment to one of the crowning achievements of European integration. This reminds us that the enduring value of the euro is not simply measured in economic terms. It is a symbol of European cooperation after the Cold War, something in which Europe’s leaders invested tremendous political capital. It is also a means for countries to exorcise the ghosts of their past, recapture some degree of sovereignty, and receive the embrace of normalcy and progress. These benefits, though difficult to quantify, constitute the motive force driving Latvia’s decision to join EMU despite lingering concerns for the euro’s future.
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