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23 June 2011

FT: Europe's return to Westphalia


Angela Merkel and Nicolas Sarkozy are forever protesting that the euro and the European Union are indivisible. They mean well. The purpose is to reassure: Germany and France will rescue the single currency because its failure would herald the collapse of the entire European enterprise.

The Union is turning back the clock a few hundred years as it succumbs to the pressure of resurgent nationalisms. The euro is in trouble because Europe is in trouble. The sovereign debt crisis is symptom as much as cause. Greek profligacy, Ireland’s housing boom and Germany’s reckless state banks all played their part. But the failure to put things right speaks to a deeper malaise. European governments can save the euro if they so choose. Orderly default by the weakest economies need not be a catastrophe if accompanied by a credible plan to underpin their future solvency and to shore up vulnerable banks in creditor countries.

The public debt of Greece, Ireland and Portugal adds up to about €680bn ($960bn). That sounds a lot. But it represents only about 7 per cent of eurozone output. Underwriting the debt by issuing Eurobonds would end the panic in financial markets. Fixing the problem, in other words, is politically painful but perfectly possible economically. The missing ingredients are trust and political will. Voters in Germany are unpersuaded their prosperity is tied to the euro’s survival; and voters in debt-laden nations need to see a plausible path out of the present trap. Ms Merkel, in particular, has to show the leadership that connects ends to means.

As the centre of global gravity shifts ever faster towards rising nations, the fragmentation of Europe will only accelerate the pace of its decline. There is, though, an irony: the new powers with which Europe must now compete have never been much convinced by the Union’s postmodernism. Jealous of their sovereignty, the Chinas, Indias, Brazils and the rest much prefer the Westphalian system. Their model is 1648 rather than the Treaty of Rome.

So history may look back on the past 60 years as an interlude. The leaders at the Brussels summit this week may yet come up with a plan to save the euro. I am not sure they know how to save Europe.

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© Financial Times


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