Is the euro a currency and a contract that works for both richer and poorer, in sickness and in health? The marriage appears to be on the rocks.
A crisis for the euro was averted this spring when Greece received some $45 billion dollars in loans from EU nations and the IMF. But there remain many unanswered questions about the currency's long-term viability. And as leaders from the 16 nations that use the euro join 13 of their European counterparts in Brussels for a two-day summit, there are new jitters.
Positive results from the stress tests of European banks in July may have been the last good news out of the continent. The prices of credit default swaps, which provide a measure of the risk of a country defaulting on its debts, have risen steadily in some weaker European markets, particularly in Portugal. This week the main opposition party in Lisbon walked out of negotiations about higher taxes. Investor concerns that leaders in Athens will not be able to make necessary budget cuts showed up in a rise in the price of insuring Greek debt that was even more dramatic than Portugal's.
Spain, and even Italy, face their own dramatic fiscal and economic difficulties, but there is a more fundamental concern that has been neglected: How can a currency union survive without a fiscal and political union? There are many leaders in Europe but not one who has been able to provide a good answer to this question. Piecemeal measures that the summit in Brussels is supposed to establish for deficit spending aren't likely to create the regulatory unity that the euro zone requires. There is a fair chance that leaders won't be able to agree on even these.
While there is absence of an adequate and unified policy regime in the euro zone, countries that use the euro are also unable to set their own monetary policies to respond to their own market's needs. While China uses its monetary policy to help its exports and the US and the UK can partake in quantitative easing, countries that use the euro have no such options. To confront these questions and to save the euro, once such a happy marriage, will require far more than this week's counselling sessions in Brussels.
