Business

Greece crisis: Is the eurozone a field of dreams?

  • 25 June 2011
  • From the section Business
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Kevin Costner in Field of Dreams
Were the seeds of the eurozone's problems sown when it was first created?

It is hard to think of a film in which Jacques Delors, founding father of the euro, is played by Kevin Costner.

But difficult though it may be, it is not impossible, because they do have one thing in common.

In the movie, Field of Dreams, Kevin Costner was told to construct a baseball stadium in the middle of nowhere by a voice that said: "Build it and they will come."

And at the conception of the euro and the eurozone, Jacques Delors and his fellow politicians took much the same attitude: "Build it and they will come... together."

The theory was that although the eurozone might be made up of lots of different countries and economic systems, they would be united by the simple fact of having a single currency and go on to create a unified, giant economy, which would eventually mean much closer political union as well.

But to many people this looked very much like putting the cart before the horse.

Playing at its best?

At the time, eminent economists and central bankers spoke about their fears that the eurozone was not what they called an optimal currency area.

It is a dry sounding phrase, but just means an area where the benefits of having one currency - the euro, dollar or pound - outweigh the costs.

It is actually quite surprising how many countries have their own currency and are not optimal currency areas.

The US is often mentioned as one where several large areas such as the Great Plains would, in theory, be much better off with their own currency.

There is, however, one big difference between the US and the eurozone. The US has a large national government that can and does move money and resources around on a massive scale from rich parts of the country to poor ones.

The European Union also does this to some extent, but its own spending, although massive, is overshadowed by the spending of national governments.

Who's in the team?

Then there is the problem of who was let into the eurozone and why.

There is a core of countries in Europe whose economies have been very closely tied together for decades.

This core of the eurozone might include Germany, France, Austria, the Netherlands, Finland and also two countries which have not joined. Denmark and Sweden would also have good claims for membership.

That might make a strong and stable eurozone but that isn't what happened.

Instead, lots of other countries were allowed to join even when they didn't meet any of the critieria that were laid down for membership.

Most notably, annual borrowing couldn't exceed 3% of GDP and total debt 60%, but those targets were weakened in political compromise after compromise and Greece, we now know, just fiddled its national statistics in order to get in.

Playing by the rules

The hope was that once Greece was in the eurozone it would mend its ways and become hyper efficient in order to compete with Germany.

Instead the Athens government found it could borrow even more money at cheap rates and promptly did just that and lied about it again.

That's how we have arrived at the crisis with Greece struggling desperately to reform enough and cut enough to earn massive bail-outs which will stop it going bust.

From here the eurozone could go two ways, the countries which are not part of the "core" leave and the eurozone becomes smaller, but made up of countries which have much more in common.

The alternative is to make Greece and the other poor countries more efficient and transfer vast amounts of money to them from the rich countries on a pretty permanent basis, in much the same way that Washington does in the US.

This would involve much closer political and economic co-operation and a vastly larger budget.

That may not be popular with the public, but as Jacques Delors and Kevin Costner both seem to know; once you've built something, more people have a stake in making it work, than in tearing it down.