Europe seems to have discovered the never-ending crisis. Greece can neither pay its debts nor mount effective budget reform. Another round of rioting has forced a cabinet reshuffle. A contagion of default threatens to engulf the rest of Europe's Germany thinks and then rethinks its Markets suffer waves of intense fear. Yet, bad as things feel now, this is only the beginning. Debt problems will plague the eurozone for the foreseeable future and impose a severe cost on all, whether located in the strong or in the weak economies. Worse, it has become increasingly clear that today's problems are more fundamental than previously thought, go beyond popular accusations of undisciplined profligacy in Europe's periphery, and lie in the basic structure of the euro.
THE SAGA SO FAR
The specific debt problems are so widely reported they hardly need another detailed review. The crisis erupted in spring 2010, when Greece revealed that for years it had hidden huge budget deficits from its own people and from EU authorities. At that time, the public purse ran at close to 40 billion [euro] in the red, almost 14 percent of Greece's GDP and far beyond the 3 percent limit preferred by European Union's Growth and Stability Pact. Still more troubling, Greece revealed that the accumulated debt from years of such deficits had brought outstanding Greek government obligations to some 130 percent of GDP, far worse than any other European country.
These revelations naturally prompted investors to flee Greek debt. Prior to the upsetting news, the government in Athens could borrow euros at rates only about 1 percentage point above the German rate. But as word got out last spring, that cost of credit rose over 8 percentage points above the German rate. The added borrowing expense so redoubled the pressure on Greece's finances that Athens could no longer sustain the situation. And because Greece's financial failings had already alerted investors to problems elsewhere in the Union--in Ireland, Italy, Portugal, and Spain--the European Union had little choice but to respond. Matters threatened the cohesion of both the common currency and the Union itself.
Even so, governments in Germany and the other, stronger EU economies were reluctant. After an embarrassingly long pause, they managed to cobble together a fund of 750 billion [euro] on which Greece and other troubled nations could draw. Members contributed to the fund in proportion to the relative size of their economies, but financing also drew on the International Monetary Fund and the European Central Bank. Any nation that used the fund would become subject to EU oversight to bring its policies back into more prudent lines. As Greece prepared to draw 110 billion [euro], it had to change its retirement rules, the wage schedule of its public employees, and take a number of other painful and unpopular steps to rein in its budget deficit. The arrangement effectively erased Greek sovereignty and made the county theoretically subject to the Union but practically to Germany.
Later in the year, Ireland fell victim to similar financial woes. Irish details differed from Greek, but the outlines of its story were substantively the same. Aggressive policy and overspending had saddled the country with an unmanageable debt load. The Irish, jealous of their sovereignty after years of fighting British control, worried over potential EU policy dictates and resisted help. Eventually, powerful Union members, fearful of the repercussions of Irish failure on Europe's financial markets, and, not incidentally, to their own banks, forced a deal on Dublin. Ireland could draw down some 85 billion [euro] from the original fund and had to yield a large measure of policy control, that is sovereignty, to the European Union. By spring 2011, Portugal fell victim to its debt in much the same way as Greece and Ireland. In exchange for access to 78 billion [euro] of the fund, it too had...