The Year in Review: The euro

Will the big dream survive the contagion?
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The Independent Online

On 29 September, a cement lorry, with the words "toxic bank" and "Anglo" painted in red letters on its sides, was driven into the gates of Leinster House, Dublin – the home of the Irish parliament. A 41-year-old property developer, Joe McNamara from Blackrock, County Galway, reportedly owed Anglo Irish Bank €3.5m. Mr McNamara provided a wonderful metaphor for the financial crisis. In Ireland a property bubble had burst and pulled the vital construction sector down with it; the banks' lending had turned sour; the banks had then to be rescued by the politicians, first in their own nation, and then by the Germans. It was all, like Mr McNamara's raid, unexpected, rapid and messy.

It should have been the year the euro was saved, perhaps even when it saved the world and emerged as a reserve currency, a store of value to replace the perennially stressed dollar. Some European idealists had dreamt the euro's moment had arrived in the deep financial crisis in 2008-2009, as Lehman tumbled, Wall Street crumbled and American financial supremacy seemed finally, fatally compromised. Instead, 2010 was the year the euro underwent a succession of near-death experiences, nightmares played out in Athens, Dublin, Lisbon, Madrid and across the world's financial markets, until talk of the end of the single currency reached far beyond the usual cranky Eurosceptic quarters.

What happened – and why? The "what" was widespread and systemic loss of confidence in the ability of some eurozone members to honour their debts as they became due. The "why" was that the European currency union was not functioning as a true political union, one where one currency and one interest rate was supported by a consistent and responsible budgetary attitude from each of its member states. Rather like a joint account where only one partner exercises any restraint, but both are liable for the debts, the eurozone started to badly malfunction. Fear of what might happen – break-up, default, inflation – drove the markets to dump these governments' debts and refuse to lend to them, making their troubles more awkward. The credit-ratings agencies, burned by getting the banks wrong, were hypersensitive to budget deficits; the safest thing was usually to downgrade a nation, and Greece furnished few reasons not to.

The peoples of Europe, committed by their political elites to an "ever-closer union", in the words of the treaties of Rome, Maastricht, Nice and Lisbon, converged in 2010 – in anger. In Athens they set fire to the parliament; general strikes gripped Spain and Portugal; and the Irish Daily Star labelled the Taoiseach and his senior colleagues "Useless Gobshites", shortly before they gave up the running of their economy to the EU and IMF.

So it was a year of "contagion", of panic spreading through markets. There was a pecking order among the "victim" nations united in the unlovely acronym "PIIGS", with Greece the most vulnerable, followed by Ireland, Portugal, Belgium, Spain and Italy: this was the order the dominoes were usually said to be ready to fall. By autumn, Belgium had joined the losers' club, sans government, and the ability of even the Germans to support so many needy neighbours was starting to be questioned by investors. A series of national financial crises beginning to merge into one, each a mere chapter heading in a bigger euro story. Sometimes, the "what" became the "why", as a crisis in one eurozone nation triggered trouble in what was taken to be the next weakest link.

As late as the spring it was hoped that the "contagion" could be confined to Greece. She was, in many unenviable ways, unique. As became clear in the course of the year, Greece effectively cheated its way into the eurozone in 2002 by massaging its national states; and, at the risk of oversimplifying matters, the Greek middle classes, let alone the rich, just didn't pay their income taxes. In a pattern that became wearily familiar, George Papandreou, the Greek Prime Minister, declared that his country was solvent and had no need of assistance. His European partners agreed, issuing impressive-sounding but funds-free pledges at summit gatherings. But the 16 presidents and prime ministers of the single currency area, foolishly, supposed that their rhetoric would serve as hard currency, and never got ahead of the markets. In May they had to scramble to provide Greece with a €110bn rescue package that few believed would be the end of the saga. Thereafter, the markets reacted with perverse Pavlovian alacrity to a national leader declaring national solvency; the greater the boast, the bigger the sell-off of bonds.

It was, in cash terms, just the start. Despite the announcement, soon after the Greek denouement, of a €770bn bailout fund backed by governments of the European Union and the International Monetary Fund to "shock and awe" troublesome markets into submission, the markets never seemed shocked or awed for very long.

By September it was Ireland's turn. The breaking point was the emergence of even larger losses than feared at the Anglo-Irish Bank. In a grim reversal of the "leverage" of easy money converting into high returns and bonanza bonuses for financiers in the go-go years, the idiot lending decisions of an insignificant Irish financial institution threatened the entire Irish state and with it the entire eurozone. Anglo-Irish was responsible for the lion's share of the additional €44.4bn the Irish government had to pump into her busted banks, a sum that was clearly too much for her. Just like Mr Papandreou, the Taoiseach, Brian Cowen, made the same confident assertions about having no need for raid; this time some of his European allies were less supportive and urged the Dubliners to take the money, for fear that if they did not act quickly the Greek tragedy and Irish farce would be repeated and visited upon them – Spain and Portugal were especially vocal at this point. The German Chancellor, Angela Merkel, wondered aloud about Irish bank bondholders being made to take loss, and how difficult it was to make the case to German taxpayers. Result: a €85bn rescue package in a little over a week.

Having issued a blanket guarantee in 2008 to banks, depositors and bond-holders – the people who lent the banks the cash they used to support their ill-fated lending into the Irish and British property bubbles – the Irish government had effectively adopted her banks' bad debts. Dublin had even set up a special state agency for their "toxic waste" of written-off, hopeless, worthless loans – "assets" of the banks only in a nominal sense. Like Iceland before (and the UK, too), Irish banks were so much bigger than the Irish economy, and their problems so acute, that investors soon worked out that supporting them was beyond the resources of the Irish state, however many austerity packages they went through. Someone, somewhere would have to lend them the money to get them out of trouble. So it proved.

By November the working assumption was that Portugal's rescue would be not long delayed, nor Belgium's, but that these two smaller nations were manageable. The huge known unknown, in a Rumsfeldian sense, was Spain. She was getting close to the sort of critical state that had done for Greece and Ireland, and shared the Irish state's problems with busted banks. She was, it was said, "too big to fail", but also possibly "too big to save". The sheer size of her economy and the sheer plight of her smaller banks, the "cajas" most exposed to losses in property, that many, even in the EU, believed that the bailout fund would have to be topped up. But the extent of her demands was essentially unknowable as the year closed. The question was: could the Germans fund the biggest rescue of all? Would they? In 2010 we asked; in 2011 we should learn the answer.

Like the maverick Mr McNamara, the jury is still out on the euro.

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