Murder on the EU Express

Article excerpt

Byline: Niall Ferguson

With the monetary union coming apart, the finger-pointing has begun. Who really killed Europe?

You remember Agatha Christie's classic whodunit Murder on the Orient Express? The problem for the great Belgian sleuth Hercule Poirot was that there were far too many suspects. The strange death of the European Union may prove to be a rather similar case.

So used are we to hearing the process of European integration likened to an unstoppable train that we discount the idea it could ever stop in its tracks. Yet the reality is that Europe has been quietly disintegrating for some time.

Outwardly, it's true, Europe's leaders still appear to be inching toward their long-cherished goal of "ever closer union." Last month they agreed to set up a new European Stability Mechanism to deal with future financial crises. It's still a long way from being the United States of Europe, but most Americans assume that's the ultimate destination: a truly federal system like their own. Think again. Not only has the economic crisis blown holes in the finances of nearly all EU states, it has also revealed a deep reluctance on the part of those least affected to bail out the hardest hit.

Americans bemoaning their own economy's sluggish recovery should look on the bright side: it's worse in Europe. The International Monetary Fund projects growth of 3 percent for the United States this year but just half that for the euro zone. Even more striking is the extent of economic divergence within the euro area. While the German economy is currently growing at an annualized rate of around 6 percent, Greek growth in the fourth quarter of last year was minus 6 percent. So much for the convergence monetary union was meant to bring.

The underlying problem is the euro's failure to create a truly integrated market for labor. In the decade after the euro's creation in 1999, German unit labor costs rose by less than 40 percent; the equivalent figure for Spain was 80 percent. Workers in the periphery took monetary union to mean they should be paid as well as workers in the German core. But their productivity didn't rise to German levels. At the same time, people in countries like Ireland took the post-1999 reduction in interest rates--one of the most obvious benefits to the periphery of euro membership--as a signal to go on a borrowing binge. The result: Ireland and Spain behaved a lot like Florida and Nevada. House prices bubbled, then burst.

In the wake of the American crisis, some banks failed--most spectacularly Lehman Brothers--but most were bailed out, and the federal deficit soared. Dollars were transferred by the U.S. Treasury from Texan taxpayers to welfare recipients in Michigan. In Europe the story was different. There was no big bank failure; all "too big to fail" institutions were rescued. National deficits soared. But when some countries ran into fiscal trouble--when financial markets started to demand sharply higher interest rates--things got ugly, because there is no mechanism to transfer euros between countries other than in tiny amounts.

The crisis has driven not just one but two divisive wedges into the European economy. First there is the fundamental political rift between the 17 EU members who joined the monetary union and the 10 who didn't. Then, within the euro zone, there is the widening economic rift between the German-dominated core and the ailing periphery--the countries cursed with the unflattering acronym PIGS (Portugal, Ireland, Greece, and Spain). …