The financial crisis playing out across the Atlantic is testing a historic half-century-old campaign to integrate the fractious countries of Europe as a single economic and political system.
Every day brings urgent news: 20,000 Greeks march on parliament to protest budget cutbacks. The euro, the common currency of 16 countries, falls again in value as investors sell it en masse. Germany grudgingly pledges huge sums of money in a gamble to restore confidence in financial markets.
For Americans, all this is more than a distant spectator event. Wall Street sell-offs driven by Europe’s troubles have already shaved the value of millions of American portfolios. Interest rates have been driven down, bad news for people who rely on bond and CD income.
And if Europe begins an extended economic slowdown, U.S. efforts to emerge from 2 1/2 years of recession will be at risk. “Europe is one of our biggest customers,” says Stephen J. Silvia, director of doctoral studies at American University’s School of International Service. “If they’re not buying, then we’re not selling.”
The situation has placed enormous stress on the cause of European unity, forged in 1951 when six countries integrated their coal and steel industries. In ensuing decades the bloc expanded to become the European Union, 27 countries in all. Today it has an economy larger than the United States’. But with disparate cultures, political systems and standards of living, the countries have often found it hard to work together.
Germany, the largest economy in the union and provider of much of its funds, took weeks to decide it would join in a bailout fund for Greece—the panic was touched off by an admission from Athens that it had been concealing the size of its deficits. That disclosure led to a mammoth sell-off of Greek assets in world financial markets, driving the euro’s value down.
Germans wondered why they should bail out a society that had shown no remorse, where people were thronging the streets to protest their leaders’ plans to cut back on very generous government services and raise the average retirement age by more than two years to 63.5.
Yet Germany ultimately came up with money, both to show solidarity with a fellow EU member and to meet a very real need to shore up the currency that Germany also uses.
European countries and the International Monetary Fund have now also set up a $1 trillion fund to defend the euro at large. Will it work? On the day the fund was announced, May 10, the answer seemed to be yes: Markets rose worldwide. Several days later, investors seemed to have a change of heart and began selling again.
Also unresolved is whether the contagion will spread to other heavily indebted countries of Europe, notably Spain, Portugal and Ireland. Spain, for one, has moved to preempt that by cutting about $19 billion from its budget. That meant reducing civil servants’ salaries by an average 5 percent starting June 1.
Flaws in the system?
Perhaps the largest question is whether the debt crisis exposes serious flaws in Europe’s postwar social contract. Europeans generally pay higher taxes than Americans, but they get a lot in return—universal health care, high pensions, free or low-cost university education. In the Netherlands, people even receive money from their government to go on vacation.