The Eurosceptic British right often refers to the eurozone as a burning building without any exits. Yet one of the most striking aspects of the present existential crisis for the single currency is how few Europeans actually seem to be looking for a way out, despite the turmoil. An Ipsos poll last week found that a majority of the populations of Germany, France, Italy and Spain would still keep the euro if they were asked to vote in a referendum tomorrow. A remarkable three-quarters of Greeks said they wanted to stay in the single currency, even after a majority of them voted for parties in elections earlier this month that rejected the terms of Greece's bailout.
It is a strange kind of burning building in which the inhabitants are apparently eager to stay amid the flames. So perhaps a better analogy for the present agonies of the eurozone would be to see the currency union as a cherished yet jerry-built structure that is tottering after being struck by a financial hurricane.
So what did the architects of the euro omit back in 1999? Why has the single currency proved so vulnerable in this global economic downturn?
There are four major structural flaws. First, strong currencies have strong central banks behind them. The US has the Federal Reserve; Britain has the Bank of England; Japan has the Bank of Japan. These are self-confident institutions that do whatever is necessary to stabilise their economies in times of great crisis, whether that means buying up large amounts of sovereign debt or slashing interest rates to support spending. The European Central Bank, however, is a pygmy in this company. The ECB's constitution puts strict limits on its ability to buy up the sovereign bonds of member states. Investors in US, UK and Japanese sovereign debt know they will get their money back because the central bank will, in extremis, print money and pay them off. Investors in Spanish and Italian debt can have no such confidence, which is why they are now desperately selling their holding of these bonds – something that is making it difficult for Madrid and Rome to fund their deficits.
Second, strong currency unions have comprehensive protections for bank depositors. The US and the UK both guarantee that bank customers will (within limits) get their savings back if a bank goes bust. This helps to prevent bank runs. But, Europe lacks this central deposit protection, which is why depositors are pulling their euro savings out of banks in weaker states and depositing them in stronger ones such as Germany. This deposit flight and attendant financial instability are heaping further economic misery on the weaker countries, pushing their economies deeper into recession.
Third, strong currency unions are backed by strong centralised governments. In the US, the majority of taxes are raised by the centre and spent by the centre. This means that if an American state is hit hard by an economic shock, it does not collapse because it automatically gets extra payments from the federal government for higher unemployment benefits. Spending on infrastructure and public services also continues to flow. But this doesn't happen in the eurozone. Instead, national governments raise all the taxes and spend them all, too. So when individual countries are hit particularly hard by an economic shock, such as a giant property bubble bursting, their tax revenues suddenly dry up and they face the prospect of bankruptcy. External support is on offer – as Greece, Ireland and Portugal have found – but it is not automatic. Rather, each bailout loan must be approved by neighbouring states. And neighbouring states, as we have seen with Germany, can be slow and begrudging in providing support, especially if they think the countries on the receiving end have been profligate.
Finally, strong currency unions are backed by strong national politics. Americans, Britons and Japanese elect national governments and those administrations take decisions with the welfare of the entire nation in mind. This is because they know they will be answerable to the entire nation at the next election. But Europeans don't elect a European government; rather they elect a German government, a Spanish government, a Greek government, etc. These politicians then, inevitably, go into negotiations with each other with their national interests, rather than the wider European interest, uppermost in their minds. This tends to result in lowest-common-denominator decisions which only serve to advertise the bloc's lack of political unity and alarm investors further.
The central design flaw in the eurozone, then, is that it is a currency without a country behind it. Can this half-built structure survive the violent storm? That is likely to depend on how rapidly it can develop the monetary institutions, fiscal transfer mechanisms and sense of common political purpose that define those currency unions that have stood the test of time. An ominous amount of work needs to be done in a tremendous hurry.