First, the crisis has exposed the central weakness of the euro currency itself: disunity. Its 16 member nations follow 16 different spending and borrowing policies. They’re supposed to align within an agreed set of constraints, but these are ignored.
There’s no fiscal unity because there’s no political unity – members want to keep their sovereignty. It may take a generation or more (if ever?) before Europeans hunger for true political unity. Until then, a way must be found to enforce the fiscal rules.
Second, despite the budgetary fault lines dividing the euro members, the larger, 27-member European Union, which includes the currency club, still has a strong pull on those countries in the union and those that want to join.
The EU’s political, strategic, and economic benefits are desirable enough to force reforms among aspirants, such as Serbia. And they’re attractive enough to impose a stringent austerity plan on Greece. On Thursday, the Greek government passed belt-tightening measures in exchange for a $140 billion rescue package from the other 15 euro members and the International Monetary Fund (IMF).
Among other things, the long-overdue austerity plan would commit Athens to slashing pensions and public workers’ pay, and raising consumer taxes (a necessity, because of widespread tax evasion).
Third, despite a new treaty that gave the EU its first full-time president and foreign minister, there’s still no single leader who can decisively pronounce, like Truman, that the buck stops here. But the de facto leader – at least in things economic – is Germany. Chancellor Angela Merkel has called the shots during the Greek crisis.
Fourth, the fact that the problem has been too big for Europe to handle, that the IMF had to jump in as well, reveals that one member is run almost like a third-world country. Other EU members may not lag so far behind, but they’re wobbly, and the markets know that.
Fifth, it should now be clear to every overspending nation and individual that, in the words of the wise German housewives of the Swabia region: “In the long run, you can’t live beyond your means.” This reminder courtesy of Ms. Merkel. Who else?
Let’s admit, though, that some lessons have yet to be learned, because some things we just don’t know. For instance, have the IMF and the nations using the euro currency struck the right balance in terms of the size of their rescue package (about $140 billion) and the severity of required belt-tightening in Greece? Go too far, and Greece could fall into a depression or implode with social unrest (such as the recent riots that left three dead). Many economists foresee debt restructuring – i.e., debt forgiveness – in which some investors will lose. And many worry that Greece will fail to implement its painful reforms.
Also unknown: Will other euro countries with big overspending problems, such as Spain, Italy, and Portugal, be able to get their fiscal houses in order? They aren’t Greece. But sometimes, markets ignore facts. They run on psychology. That’s why it’s important for Europe to show as publicly as possible that it’s learning its lessons.