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The European Disunion – will the euro survive? May 23, 2010

Posted by Yilan in EU, European Union, France, Germany.
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As the currency crashes and the Continent is swept by protests, even key members such as Germany and France are starting to think the unthinkable about the euro.

Nicolas Sarkozy and Angela Merkel

Germany’s announcement of a unilateral ban on speculative trading in the euro infuriated France, which felt the move smacked of disunity Photo: REUTERS
Spaniards march against the austerity measures of the spanish government in Madrid

Spaniards march against the austerity measures of the Spanish government in Madrid Photo: AFP/GETTY

Like many of Spain’s 4.5 million unemployed, Cinthia Carvajal is on the verge of despair. The 41-year-old marketing executive has jobhunted non-stop for the last six months, but with the country in the grip of its worst recession in 50 years, there are precious few firms needing anything to be marketed.

She will now take whatever job she can find, but with unemployment running at 20 per cent nationally, the few offers come her way are generally less than tempting.

“I spend my whole time going for interviews,” said Ms Carvajal, who receives €475 (£388) per month in unemployment benefits. “But often they want you to work on the black market to avoid paying taxes, and I’m not prepared to do that.”

Spain’s jobless rate is currently double the the average for the euro zone, rising to nearly 32 per cent in places like Cadiz, a windswept port that has never recovered since its shipbuilding yards went the same way as those on the Clyde.

The economy shrank nationwide by nearly four per cent last year, and in the bars of Cadiz’s winding, cobbled streets, the sense is that things can only get worse – which, last week, they effectively did.

On Thursday, in a bid to avoid a Greek-style deficit crisis, the socialist administration of Prime Minister Jose-Luis Zapatero approved highly unpopular moves to slash public spending by €15 billion, which will include sacking 13,000 civil servants, trimming public sector wages by 5 per cent, and freezing state pensions.

Out, too will go to the €2,500 birth grant for all new-born children – just one of the generous social benefits that Madrid can no longer afford.

Mr Zapatero has billed it as a painful but necessary dose of financial medicine, but as in Greece, many of Spain’s 45 million citizens seem reluctant to swallow what government deems good for them.

Trade unions have already announced plans for industrial action in early June, and among the legions of unemployed, there is talk of joining them for what could be a long and possibly violent summer of street protests.

“It´s scandalous. I´ve spent almost 40 years working, paying my taxes, trying to make a living, and now they do this,” said Jesus Gonzalez, 53, an out-of-work construction supervisor. He has not donned his hard hat since 2007, when the global economic downturn stopped Spain’s decade-long construction boom dead in its tracks, leaving a mass of half-built ruins in nearly every city. “A general strike is not far away,” he added. “It´s coming.”

However, should Mr Zapatero’s government be overwhelmed with Athens-style riots and petrol bombs, it can expect little chance of financial assistance from Spain’s wealthier euro-zone neighbours further north. For the crisis in the euro precipitated by the €110bn (£96bn) bail-out of Greece has left its core members, France and Germany, agonising over more than just whether they should bankroll past decades of Greek profligacy.

Instead, it has exposed divisions over entire future of the common currency itself, and which countries should stay in it – including themselves.

The first cracks came last Wednesday, when Germany announced a unilateral ban on speculative trading in the euro, without consulting any other member nation. Chancellor Angela Merkel, who has suffered a furious backlash from the German public for agreeing to the Greek bailout, claimed to have acted because the currency was at risk from so-called “wolf pack” speculators.

But her actions infuriated France, which felt the move smacked of disunity, and failed to impress the markets, which smelt panic.

President Nicholas Sarkozy, too, has been showing signs of cabin fever in Club Euro. At a closed-doors meeting of European leaders the previous Friday, he reportedly threatened to pull France out of the euro altogether unless fellow nations stopped dragging their feet over the Greek bail-out plan.

“Sarkozy ended up banging his fist on the table and threatening to leave the euro,” said the Spanish newspaper El Pais, citing comments sourced to Mr Zapetero’s camp. “This forced Angela Merkel to give in and reach an agreement.”

Embarrassingly for the two leaders, the spat also came as David Cameron paid his first visits to both countries as prime minister. If they were hoping to disabuse him of his Eurosceptic instincts, this was not the way to do it.

Such bickering amid the two nations at the very heart of the European Union used to be unthinkable. For France and Germany, the euro was originally seen not just as a method of exchange, but the glue of the entire Euro-vision: a sink-or-swim-together mechanism by which individual nations could avoid the economic crises that drove them to each other’s throats in the Second World War. Yet as a 1930s-style recession has once again swept the continent, the euro seemed to have stoked, not tempered, those old nationalistic instincts for self-preservation.

That much was revealed in an extraordinarily frank statement last week from the German interior minister, Thomas de Maizière, as he defended his government’s hesitation over shouldering the lion’s share of the Greek bail-out. Bluntly, he warned that the Germany forged in the post-war years – cautious, consensual, and keen only on what was best for the European Union as a whole – might soon be a thing of the past.

“It may be new for Europe that Germany is representing its interests with new vigour,” he said at a briefing in Berlin, where the Sunday Telegraph was present. “But for Britain, France or Italy, it was always a matter of course. We are also using new language in putting our arguments. The biggest net payer into the EU budget has to defend its interests.”

In France, the messages are also now mixed. Many believe that Mr Sarkozy’s alleged pull-out threat was little more than sabre-rattling, pointing out that the French political establishment has long been wedded to the euro. Yet Nicolas Dupont-Aignan, a fomer member of Mr Sarkozy’s UMP party who now runs an organisation called “Republic, Stand Up”, claims to have got tens of thousands of signatures for his newly-formed petition, titled “Let’s Leave the euro Before It’s Too Late”.

“Great Britain was very fortunate to stay out of the euro,” he said. “Why should we have to pay the debts of other countries? The politicians in France created a religion, a dogma around the euro. But France is not Germany, and the French people do not want the German austerity cure, either politically or socially.”

It is all a far cry from the cosy, communitaire mood that prevailed when the Lisbon Treaty finally came into force last December, a document designed to usher the EU’s 27 nations into quicker and deeper integration than ever before. When the unknown Belgian Herman van Rompuy was then appointed President of Europe, marking a new era in the ascendancy of Brussels over nation states, he probably little imagined that one of his first major isues in office would be whether the euro had a proper future. Yet just at a time when it should be truly coming of age, the 15-year-old currency, now used by some 327 million people, is looking distincly sickly, having shed nearly a fifth of its value in the six months since Mr Van Rompuy came to power.

As Eurosceptics are fond of pointing out, even the design of the currency’s € sign now seems an exercise in hubris rather than vision. Not only is the curved part of the symbol based on the letter Epsilon – a character from, yes, the Greek alphabet – the two parallel lines that intersect it are supposed to represent stability. Given recent events, neither allusion appears particularly appropriate.

Part of the current discord between France and Germany stems from historically different visions of what the euro is for. Prudent Germany sees it as a tool for stabilisation, a bulwark against the rampant inflation that was their country’s undoing back in the 1930s.

But the French believe it can also serve as a tool for dirigiste economic stimulation, hence their greater support of its use for the Greek bail-out. But in blaming the euro’s woes on the bogeymen of either merciless speculators or spendthrift Greeks, both countries conveniently ignore their own role in the crisis.

Part of the reason why southern European nations like Spain and Greece are currently in so much debt is that the northern European nations were prepared to lend to them the cash in the first place, explains Simon Tilford, chief economist at the Centre for European Reform. The construction boom in Spain, for example, wasn’t financed out of nowhere: it was fuelled by enormous sums of cheap cash borrowed at very low rates.

“There were huge imbalances within the Eurozone, so you had big export surpluses in Germany which were being channelled into housing and construction booms in the south. Most of the growth in those southern economies was built on debt, and now they can’t get out of it.”

The obvious solution, he said, would be to devalue their currency, making exports cheaper and the economy grow, but that is not an option as long as they remain in the euro. Without such growth, though, the tax base – vital for paying off any big public debts – will never increase.

So might any nation actually leave the euro for good? The practical difficulties of doing so are almost as great as the ideological ones. As well as redesigning every cash and vending machine, every single financial contract – from pay deals to taxes and pensions – would need to be rewritten, and possibly re-negotiated. As such, so far only the smaller, less important economies like Greece and Portugal have been tipped for a possible exit. For France and Germany, the marriage will survive for better or worse, no matter how much the love affair may have cooled.

“National governments currently have to put the home interest before the European ideal to satisfy their electorates,” said Stephen Lewis, chief ecomomist at Monument Securities, a London-based stockbrokers. “But if any of the big EU nations went back to their own currencies, it would probably spell the end of the EU project as we know it.”

As the eurozone’s fourth largest economy, that also rules out a pull-out for Spain, no matter how much it might shorten dole queues on the streets of Cadiz.

Yet while some Spaniards contemplate taking to the streets, others admit that the euro-crisis may provide a much-needed wake up call. Ruben Perez Llorente, 35, a banker who lost his job last May, says the country “urgently needs to re-invent itself” after years of living beyond its means.

“Spain is not Greece – our workforce and our financial culture is stronger,” he said. “But we do need to change our way of thinking, and become more like Germany. They are light years ahead of us in terms of work culture, management, productivity, and reasonable retiring age.

“For me, there is no European Union, as we are all so different. But the only reason Spain is reacting now is because it has been forced to by the international community. Germany has put its foot down – and you can understand why.”

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