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Crisis in Ireland tests eurozone vision of common currency, common interests

The Greece and Ireland debt crises have raised more questions about a currency that was supposed to unify Europe.

By Staff writer / November 23, 2010

Commuters pass through Comercio Square in Lisbon, Portugal. High debt levels there – as in Greece, Ireland, and Spain – have driven borrowing costs to unsustainable levels. Portugal’s latest state budget includes sharp tax increases and deep spending cuts.

Armando Franca/AP

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Paris

When the euro was launched 11 years ago, it was celebrated as the culmination of a vision of postwar Europe that was erasing borders and dismantling its nationalistic past. It was heralded as a great unifier of nations with common interests and equally cherished values.

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But a series of financial crises is shaking Europe’s core and raising fresh questions about its single currency as well as the solidarity of a union whose cooperation and stability date to the aftermath of World War II.

From the Greek financial disaster earlier this year, to an Irish bank debt crisis that has pushed Ireland to accept up to $120 billion in bailout funds, Europe is struggling to rescue a currency so closely linked to its unity that German Chancellor Angela Merkel recently said, “If the euro fails, Europe fails.”

Mrs. Merkel, who has been dubbed Germany’s new “Iron Chancellor” for her tough approach to Europe’s flagging economies, has been pushing for greater fiscal responsibility in the eurozone. This is the new age of European austerity, after all.

In October, she proposed amending Europe’s unifying Lisbon Treaty to create a permanent bailout mechanism, which would come with requirements that government spending would be cut and taxes raised. Ireland and Greece have been fuming since.

Irish officials and some leading economists say other Merkel comments have undermined Ireland’s financial position. She insisted, for example, that private investors suffer some losses (“take a haircut,” in financial-speak) when poorly performing bond markets lead weaker states to ask for EU loans. That set off an Irish bond selling frenzy that brought the debt-stricken country to its knees.

In early November, Merkel even questioned whether Greece, whose January crisis led to the creation of a $1 trillion stability fund, should have joined the
eurozone in the first place.

At home, Merkel is facing a German populace that’s increasingly uneasy with bankrolling its less disciplined neighbors. A German official on Nov. 16 said the European Union cannot simply “throw money from helicopters.”

A two-tiered euro?

While the euro was meant to unify, the current economic turmoil is causing wealthier eurozone members – Germany, the Netherlands, France, and Scandinavian states – to reconsider how the eurozone operates. The notion of a two-tiered euro – one for the north and one for the south – has emerged. The idea of nations withdrawing from the euro has also been floated.

Which way forward?

Debt crises in weaker eurozone nations threaten to undermine the euro and sink other eurozone economies. Among the possible directions:

• Bailouts: Greece got one in May; Ireland is next. Will Portugal follow? Or Spain?

• Austerity: Solvent Germany has been vocal in urging deep cuts and tax hikes.

• Fracture: Institute two eurozones, one for the rich north, one for the poorer south.

• Withdrawal: Nations consider the drastic step of dropping out of the eurozone.

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