Bruce Anderson: The euro is entering its final phase

No one told electorates in rich countries they would have to pay up for the rest, because even in war-guilty Germany every sane politician knew what the answer would be

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The euro is in a mess. Even some of its stoutest defenders now agree that its survival is threatened. But the problem is being misdiagnosed. Although the catalyst was Greece and southern Europe, the underlying cause lies to the north, in Germany. The euro is the latest crisis in modern German history and the German political elite's search for a stable identity.

This is something that it is hard for the English to grasp, which is paradoxical. The English live in the midst of their history. Ancient historical forms are still preserved in their modern constitution. Yet they often seem unaware of the extent to which history can scar, condition and confuse other nations. Germany was certainly scarred. By 1945, two-fifths of the males who had been born between 1915 and 1925 were dead or missing. Germany's cities were in ruins. Millions of Germans who had been ethnically cleansed from Poland and Czechoslovakia were about to limp home to a shattered country, in which millions more were already on the verge of starvation. But it was not just the physical destruction. The nation of Bach and Mozart and Beethoven had descended into bestiality. In 1945, economic recovery must have seemed inconceivable; moral recovery, impossible. Many sensitive Germans thought that they and their descendants had forever forfeited their right to hold their heads high among the nations.

In the post-war years, those thoughtful Germans were able to make common cause with other Europeans who were determined to ensure that there would never be another European civil war. The continent had barely survived two: a third would finish it off. So the European movement recruited the idealism of some of the ablest politicians of the post-war vintage.

There was only one problem: historical change. Terror and death had imposed a brutal discipline on the peoples of Europe. North of the Balkans at any rate, Europeans realised that the age of boundary disputes and irredentist conflicts was over. It was replaced by an era of economic co-operation. Europe started again where it had left off in 1914: interdependence, a steady growth in trade, increasingly open markets. As a result, a broken continent recovered. The end of the Cold War, the disintegration of the Soviet Union and the recovery of the states which had been left behind appeared to conclude that process. The age of the abyss was over.

But abyss politics retained its momentum, in the attempt to build a united Europe. Denied the pleasures of German patriotism, the German political class became European patriots. Then there were the French. They were defeated in 1870 and 1940. They almost bled to death in 1914-18. Dien Bien Phu, Algeria: the end of French imperialism was much more scarring than its British equivalent. Dean Acheson said that the British had lost an Empire but not yet found a role. Nobody said that about the French, because it never occurred to anyone that France could have a role. The post-war British were surprisingly relaxed about their relative decline (though it helped to create Scottish nationalism). The French were determined to reassert themselves, and Europe seemed the way. Both France and Germany had humiliations to exorcise; for both of them, Europe seemed to be a form of historical psychotherapy. The Germans would be good Europeans. The French would organise Europe, so that it could be run by a French jockey on a German horse.

The climax of this was the single currency, which is a good argument against allowing psychologists to have any role in running currencies. The euro could easily have worked, on one condition: that the euro-zone became a country. Otherwise, it was always doomed. There is a simple explanation for this. In all countries, rich regions and rich people subsidise poorer regions and poorer people. This enables the latter to use the same currency as their prosperous neighbours. Without fiscal transfers, the poorer areas would not be able to earn enough. So the logic of the euro was that the rich countries would transfer funds to the poorer ones.

There followed deceit and delusion. No one told the electorates of the rich countries that they would have pay up for the rest, because even in war-guilty Germany, every sane politician knew what the answer would be. Instead, German politicians deceived themselves. They decided that the poorer countries would not need subsidies, because they would start to behave like Germans. They would learn about high productivity rates and high savings ratios. The acme of this self- deceit came over Greek membership of the euro. Berlin is now indignant, which it has no right to be. Germans who trusted the Greek government's figures were not only naïve. They were certifiable. Any sensible person would have expected the Greeks to turn up with a Trojan horse full of monopoly money. Those who chose to believe Ulysses's descendants have only themselves to blame.

But the Germans thought that they had placed limits on their naïveté, and on others' misbehaviour. French jockey or no, the Germans did ensure that the European Central Bank (ECB) would merely be a multilingual Bundesbank, profoundly averse to inflation. Although it was bank-krieg not blitzkrieg, the euro would enable the Germans to control the eurozone.

This demonstrates the limits of German psychological insight. The southern Europeans did not want to work like Germans or save like Germans. They only wanted a German credit rating, so that they could spend like lottery winners. They have, without first taking the precaution of buying a winning ticket. Now, it is not clear how they can stay in the euro and still grow their way out of their deficits. For us Brits, this is not as funny as it sounds. We need them to grow so that they will be able to buy our goods, to help us deal with our deficit. As sterling will surely strengthen against the euro, our exporters' problems will be compounded.

To add to the European policy-makers' anxieties, there is another psychological problem. The German patient has recovered from war-guilt and is no longer crippled by an identity crisis. Most Germans of working age think that it is not them but the squandering southerners who ought to be regarded as pariahs. Though the EU is part of their political identity, the Germans are not prepared to sacrifice their prosperity to others' profligacy.

So it is hard to see how the euro can survive.

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