By Gulf News
The European single currency, launched in 1999, was intended to bring the continent closer together. It has in reality caused keen divisions and enmities. These were exemplified in the visit of Angela Merkel, the German Chancellor, to Greece.
The debt crisis of the euro zone has consigned Greece to a devastating recession in which living standards have been squeezed and the unemployment rate stands at 26 per cent.
The straitjacket of monetary union has made it harder for Greece to resolve its structural economic weaknesses. Even so, it has done much to address them. And within the confines of the euro, Greece's road to recovery might have been easier had it not been for the obduracy of Ms Merkel and successive French governments.
The debt crisis of the euro zone has many causes. The indebted economies all have a slightly different mix of problems. In Greece's case the public finances were the weakest link.
When the euro was launched. Greece was excluded for failing its economic criteria. Instead, it acceded to the euro in 2001. The one-off fall in borrowing costs, as Greek interest rates converged to German levels, encouraged a borrowing binge. Instead of using euro membership as an opportunity to make structural reforms, Greeks held a giant party.
When the global financial crisis took hold in 2007, the country was left with an extended welfare bill, an absurdly generous retirement age, a tax collection system that did not work and public finances out of control.
If Greece had retained its national currency, the drachma, it could have opted for a currency depreciation to become internationally competitive. That would not have been a cure-all. To be effective, devaluation would still have required a tight control on wage settlements and sweeping budget cuts. But these would have been easier.
As it is, Greece has had no option but a crushing internal devaluation. All the adjustment has had to be in cuts in real wages, benefits and living standards, and not in the exchange rate.
There was no other course, having abandoned monetary independence. Yet it could still have been easier if Greece had bowed to the inevitable and restructured its debt burden by requiring banks to write down the value of their holdings of Greek sovereign debt.
Greece did not take that course for a good two years after its crisis broke because it was opposed by the governments of Germany and France.
The reasoning was that the banking sector was weak and German voters would not look kindly on budgetary transfers to Greece to bail out its profligate governments.
It is, in short, because of Ms Merkel that Greece has had to undergo more pain than was strictly necessary in order to secure a 237 billion euros international bailout.
Be that as it may, Greece has valiantly taken steps to adjust its spending and its people's living standards to its means. Ms Merkel's visit was symbolic of Greece's rehabilitation in international financial markets. Last week Greece issued 300bn euros of bonds in the market.
The lessons of this saga are that monetary union requires centralised budgetary decision-making. That in turn creates a democratic deficit, which is why it is a bad idea in principle. Greece has paid a heavy price.
