The European Union was a grand project in human history, designed to be a triumph of liberal Western values over the bloody history of the continent. Its hallmark was monetary integration on a scale unheard of since the days of the Roman Empire. The debt crisis in Europe has been raging since shortly after the implosion of the global economy in the fall of 2008, and it seems no matter the measure taken by the member governments there, it stubbornly refuses to end.
Germany has been the paymaster of the continent, authorizing and reauthorizing bailout after bailout of the debtor countries: Greece, Portugal, Ireland, and likely Spain and Italy next. Greece has seemed particularly resistant to the bailouts, as the government there has dragged its feet on implementing austerity and the economy there has been in a state of free fall for nearly two years. Austerity is the new budgetary model for the continent, and it’s likely to persist for a long time in Europe. Not that austerity has worked. It hasn’t. Most of southern Europe along with Britain is once again in recession, French growth has slowed once again and growth is beginning to show significant signs of slowing in northern Europe.
And the death knell for any future bailouts is coming up next: Moody’s has lowered the credit outlook on Germany, the Netherlands and Luxemburg to ‘negative,’ citing continued exposure to fallout from economic instability in Greece. Even supposing that all of the major political and economic actors were in agreement on what needs to be done, which at this point is a stretch, the fact of the matter is that if markets view Germany as not having the wherewithal to credibly back further financial rescues, they won’t be forthcoming, regardless of whether or not already divided politicians can agree on them, which is unlikely in the first place.
The European project is on the ropes. In some respects, it went too far, too fast (monetary union) and in other respects, it didn’t go far enough (budgetary coordination and a banking union). Its fundamental problem, however, was that many member states, for a very long time, spent much more than they took in, and they expected, wrongly, that membership in the European Monetary Union would cushion whatever inevitable fallout they with which they would have to contend. And that model worked, for as long as other member states were both willing and able to underwrite their political and budgetary dysfunction.
That willingness is quickly fraying, and if other ratings agencies follow suit, the ability will soon follow, and we will yet again begin seeing drachmas, lira and pesetas in circulation.