The Greeks Are Being Unfairly Maligned by Global Financiers: The Truth Is Very Different

Beyond the anti-Greek media campaign lies the story of a weary people caught between a corrupt political system and rapacious financiers. Sound familiar?
October 17, 2011  |

Photo Credit: AFP
Yiannis manages a small inn in Crete. The 50-year-old from Heraklion with salt-and-pepper hair and a hefty moustache has a son just graduating from college.

“We tell the young people to leave,” he says quietly. “There’s nothing for them here.” Protests and strikes are sweeping the nation, but Yiannis doesn’t like talking about the economy. I sense a feeling of pride holding him back. But he does offer this insight: “We know that it is the ordinary people, not the rich and the powerful, who pay for this.”

The Lazy Greek Meme

Greece is a land of ancient myth. But more recent myths have made Greeks like Yiannis cringe when foreigners start asking questions.

Greeks are lazy. They don’t work. They’re profligates who are taking down Europe. The caricature has become so common that a recent TV commercial in Slovakia used it to sell beer, drawing a contrast between the virtuous Slovak and the paunchy Greek indulging himself on a beach.

Most foreigners know Greece from holidays spent lolling on its beaches and drifting around its magical ruins. You could easily take it for granted that everybody here is just chilling out. They aren’t. The Greek labor force, comprising 5 million souls, works the second highest number of hours per year on average among countries in the Organization for Economic Development (OECD), right after South Korea. Greeks work 42 hours per week, while the industrious Germans toil just 36.

The average Greek worker earns a bit over $1,000 a month. Private sector employees are the most underpaid in the EU. Even before the harsh austerity measures imposed by the EU and the IMF, the Greeks had already cut the real average wages in the private sector to 1984 levels. This week the Greek parliament is expected to vote on measures that would place 30,000 public sector workers in a “labor reserve” at slashed pay – up to 40 percent.

Greeks retire a bit later than the European average. And the average pension, $990, is less than that of Ireland, Spain, Belgium, and the Netherlands. Thirty percent of the labor force works with zero Social Security or protections, while in the rest of the EU only 5-10 percent of workers are in this precarious situation.

So much for the myth of the overpaid, lazy Greek.

The reality is simple, though rarely admitted – except maybe by Yiannis, who seems to know exactly what’s happening. The “bailout” of Greece is really a bailout of big European banks. A game of smoke and mirrors leads us to think that Greek indolence led to financial ruin. The Greeks have done some things wrong, to be sure. But it was a dangerous mix of stupid economic theories and high-flying finance, fueled by a corrupt government, that exploded the economy. If all this sounds sickeningly familiar, it should. We’re witnessing Round 2 of the Great Global Shakedown by the banks.

Mini-History of the Modern Greek Economy

In modern history, southern economies have typically been weaker than those in the north. They industrialized later and only fitfully; large landowners often dominated them far into the 20th century. Economic growth was painful, marked by big deficits, bloody political conflicts and instability. You can see this in the history of Italy, Spain, and even France to a degree, but especially in Greece. The Greeks got socked in WWII and then creamed again by a brutal civil war (1946–1949), in which American military aid to the Greek governmental army ensured the defeat of the Greek Communist Party.

After WWII, the Truman Doctrine and the Marshall Plan determined relations between the U.S. and Europe. The economic recovery of Germany—designed to benefit American multinationals like IBM, Ford and General Motors – was a high priority. (Watch a fascinating lecture by economist Joseph Haveli here.) Greece mattered to the U.S. as a strategic barrier against the USSR in the Cold War, so it decided to support Greece with economic and military aid, fearing that another communist domino would fall.

Italy’s Ambitious Plans to Recover Billions From Tax Evaders

Italian Prime Minister, Silvio Berlusconi

Italian Prime Minister, Silvio Berlusconi

Italian Prime Minister Silvio Berlusconi raised eyebrows back in 2004 when he publicly philosophized over whether Italy’s heavy taxes made tax evasion a “natural right.”

Now that Italy is staring into the abyss of the euro zone debt crisis, Mr. Berlusconi is no longer waxing philosophical.

Measures aimed at fighting tax evasion are a central plank in Rome’s efforts to balance Italy’s budget by 2013 and appease the European Central Bank, which is currently propping up the Italian bond market.

Billions in revenue will be recovered by cracking down on Italy’s infamous tax-evaders, the government argues, plugging large holes that emerged in Rome’s €45.5 billion austerity budget after the government scrapped politically unpalatable proposals, including tax increases and a pension overhaul.

“The problem is that we have an unsustainable fiscal pressure weighing on the official side of the country”, Industry Minister Paolo Romani said in a recent interview at the Ambrosetti conference in Northern Italy. “We have to get €240 billion in phantom income back into official circulation, which means €120 billion in evaded taxes,” he added.

Economy Minister Giulio Tremonti said he expects to recover from tax evasion €700 million in 2012 and €1.6 billion in 2013, by introducing prison sentences for evaders and by forcing tax payers to provide more detailed banking information with their tax returns.

Speaking at the Ambrosetti conference, Mr. Tremonti noted that only 796 people in Italy declared incomes above €1 million last year while little more than 3,300 people earned more than €500,000.

Analysts and European Union top brass question whether Italy is betting too heavily on its ability to rein in tax evaders.

Similar policies have fallen short of their revenue-boosting goals in other countries, such as Greece, because the effectiveness of anti-evasion measures are hard to predict. Measures such as Italy’s jettisoned plan to levy a 5% tax on people who earn more than €90,000 tend to deliver more reliable results, because they target salaried workers who can’t hide their income from the tax man.

The government, however, argues the fairest way to restore Italy’s fiscal health is to simply to make the chronic evaders pay up, rather than levying heavier taxes on those who have already borne the brunt of Italy’s fiscal burdens.

That rationale offers a new spin on Mr. Berlusconi’s past musings on Italian-style fiscal justice. In his 2004 address to Italy’s tax police, the billionaire media mogul declared:

“There’s a norm of natural right that says if the state asks you for a third of your hard-earned money, the request seems right and you’ll give it in exchange for state services. But if the state asks you for more, or much more, you’re being bullied. Thus, you focus on finding ways to avoid–or even evade–that feel in harmony with your inner sense of morality, that don’t make you feel guilty.”

Swiss Banks Tax Evasion Deal To Hit UK Savers

British taxpayers who have money stashed in Swiss banks could see a significant chunk taken by the Treasury after a deal was struck between the two countries.

Existing account holders could be hit by a one-off deduction of between 19% and 34% in an attempt to settle any tax they owe.

Those who have already declared the full details of where their money is and paid their taxes should be unaffected by the plan, which could raise £5bn for Treasury coffers by 2015.

Chancellor George Osborne said the agreement heralded the end of an era when it was “easy to stash the profits of tax evasion in Switzerland“.

However, tax justice campaigner Richard Murphy told Sky News the deal set an “appalling precedent”.

“Honest taxpayers will now see that it pays – you get a reduction on your tax bill – by cheating, by hiding your money offshore,” he said.

Treasury minister David Gauke disputed the claim, saying that individuals who were being pursued by HMRC over unpaid taxes would be excluded from the deal.

“This is not one big amnesty,” he told Sky News.

George Osborne leaves 11 Downing Street on August 11

George Osborne said the wealthy must pay their fair share

 UK residents with money in Switzerland will also be affected by a new tax deducted at source, which will be 48% on investment income and 27% on gains.

The two countries have agreed to share more information and, as a gesture of good faith, Swiss banks will make an up-front payment to the UK of £384m.

The country is keen to shed its image as a safe haven for money that has not been properly declared to HM Revenue and Customs in the UK.

“Tax evasion is wrong at the best of times, but in economic circumstances like this it means that hard-pressed, law-abiding taxpayers are forced to pay even more,” Mr Osborne said.

“That is why this coalition Government made it a priority to go after those who don’t pay their fair share.

“We will be as tough on the richest who evade tax as on those who cheat on benefits.”

There is a stark choice for those who have abused Swiss banking secrecy – come forward and disclose, or run the risk of losing over a third of your historic Swiss assets.

Paul Harrison, KPMG‘s head of tax investigations

The deal is politically significant because the coalition wants to demonstrate its cuts to some benefits are being matched by equally stringent policies affecting the rich.

Describing it as an “historic” announcement, Exchequer Secretary to the Treasury David Gauke said too many people had abused Swiss banking secrecy.

“The message is clear: there is no hiding place for tax cheats,” he added.

However, experts warned wealthy UK residents may simply transfer their cash elsewhere to avoid paying up.

Chris Oates, head of Ernst and Young’s tax controversy team, predicts more people will move their assets to Liechtenstein.

“This will undoubtedly provide a much-needed boost to the UK’s finances. It is expected to generate billions of additional tax flows to the UK Exchequer,” he said.

Job Centre Plus

The coalition wants to show it is targeting rich cheats, not just benefit claimants

“But HMRC will miss an opportunity to establish whether these individual cases are involved in much wider tax evasion as it will only be based on Swiss assets.”

KPMG’s head of tax investigations, Paul Harrison, said the move was “very significant”.

“It seems there is a stark choice for those who have abused Swiss banking secrecy – come forward and disclose, or run the risk of losing over a third of your historic Swiss assets,” he explained.

“But the authorities need to take care that the innocent and the confused do not get caught up in this.

“There will be people who simply don’t know whether they have a problem and they will need help to sort their affairs out.”

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Europe’s Failure to Stem Banking Crisis Haunts Markets Again

German Logo of the ECB.

German Logo of the ECB.

Four years to the month since the global credit crisis began, European lenders remain dependent on central bank aid, plaguing markets and economies worldwide.

Emergency steps such as unlimited loans from the European Central Bank are keeping many banks in Greece, Portugal, Italy and Spain solvent and greasing the lending of others, while low interest rates and debt-buying are containing borrowing costs. Such aid is needed as concerns about slowing economic growth and sovereign debt prompt banks to curb lending, stockpile dollars and hoard cash in safe havens.

“I’m not sleeping at night,” said Charles Wyplosz, director of the Geneva-based International Center for Money and Banking Studies. “We have moved into a new phase of crisis.”

Central bankers rescued financial firms after the collapse of Lehman Brothers Holdings Inc. in 2008 by providing limitless funding of as long as a year. While they treated the symptom — a lack of ready cash — politicians, regulators and bankers in Europe have proved unable to cure the root cause: some European lenders are at growing risk of insolvency.

The tremors, the biggest since Lehman’s collapse, were triggered by European governments’ continuing inability to stop the sovereign debt crisis from spreading beyond Greece, Portugal and Ireland to question the Italy and Spain. Renewed signs of economic weakness globally and the downgrading of U.S. debt by Standard & Poor’s rekindled concern about the quality of all government debt.

Bank Stocks Tumble

The signs of distress are widespread and mounting: Banks deposited 128.7 billion euros ($186 billion) overnight with the ECB yesterday, more than three times this year’s average, rather than lend the money to other firms. Banks also borrowed 555 million euros from the Frankfurt-based ECB’s overnight marginal lending facility, up from 90 million euros the day before.

European bank stocks have sunk 20 percent this month, led by Royal Bank of Scotland Group Plc and Societe Generale SA. Edinburgh-based RBS, Britain’s biggest government-controlled lender, has tumbled 43 percent, and Paris-based Societe Generale, France’s second-largest bank, dropped 39 percent.

The extra yield investors demand to buy bank bonds instead of benchmark government debt surged to 302 basis points yesterday, or 3.02 percentage points, the highest since July 2009, data compiled by Bank of America Merrill Lynch show. The cost of insuring that debt against default surged to a record today. The Markit iTraxx Financial Index linked to senior debt of 25 European banks and insurers rose to 252 basis points, compared with 149 when Lehman collapsed.

Greek Default Concern

It was the specter of government debt turning toxic that has revived the liquidity crisis policy makers had tried to stop in 2008. As speculation grew that European banks would have to write down their holdings of more governments’ debt after a Greek default, lenders pulled funding to those banks that held the most peripheral debt. It also raised concern European governments would struggle to afford a further bail out of their banks, because both the state and the lenders had failed to reduce their borrowings since the onset of the crisis.

“The debt has been transferred from the banks to the sovereign, but it hasn’t actually been eradicated,” said Gary Greenwood, a banking analyst at Shore Capital in Liverpool. “Until the sovereigns get their balance sheets in order, then these concerns are going to remain.”

Funding markets have seized up as investors speculate that sovereign debt writedowns are inevitable. Banks in the region hold 98.2 billion euros of Greek sovereign debt, 317 billion euros of Italian government debt and about 280 billion euros of Spanish bonds, according to European Banking Authority data.

Euribor-OIS

The difference between the three-month euro interbank offered rate, or Euribor, and the overnight indexed swap rate, a measure of banks’ reluctance to lend to each other, was at 0.66 percentage point today, within 4 basis points of the widest spread since May 2009.

“The central bank is the only clearer left to settle funds between banks,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “There is a mistrust between banks in general, between regions and with dollar providers overall.”

Overseas banks operating in the U.S. may have cut dollar holdings by as much as $300 billion in the past four weeks as European banks faced a squeeze on funding and sought dollars, Jens Nordvig, a managing director of currency research at Nomura Holdings Inc. in New York said Aug. 18. Dollar assets declined by about 38 percent to $550 billion in the period, he said.

‘More Nervous’

“Banks are becoming more nervous about being exposed to other banks as they hoard liquidity and become more suspicious of other banks’ balance sheets,” Guillaume Tiberghien, analyst at Exane BNP Paribas, wrote in a note to clients on Aug. 19.

By contrast, banks in the U.S. are “flush” with liquidity, loan loss reserves and capital, Goldman Sachs Group Inc. analyst Richard Ramsden wrote in an Aug. 6 report. Large commercial banks combined holdings of cash and securities at large have climbed to 30 percent of managed assets, up from 22 percent at the start of the U.S. financial crisis in October 2007, Ramsden wrote, citing Federal Reserve data.

The Federal Reserve, which provided as much as $1.2 trillion of loans to banks in December 2008, wound down most of its emergency programs by early 2010. One of the few exceptions was the central-bank liquidity swap lines that provide dollars to the ECB and other central banks so they can in turn auction off the dollars to banks in their own jurisdictions.

Trichet, Bernanke

Banks’ woes are again thrusting central bankers to the fore as ECB President Jean-Claude Trichet joins Fed Chairman Ben S. Bernanke and their counterparts from around the world in traveling this week to Jackson Hole, Wyoming for the Kansas City Fed’s annual policy symposium.

After increasing its benchmark rate twice this year to counter inflation, the ECB this month provided relief for banks by buying Italian and Spanish bonds for the first time, lending unlimited funds for six months, and providing one unnamed bank with dollars to satisfy the first such request since February. In doing so, it’s maintaining a role it began in August 2007 when it injected cash into markets after they began to freeze.

Coming to the rescue isn’t easy for the ECB. Its balance sheet is now 73 percent bigger than in August 2007 and its latest bond-buying opened it to accusations that by rescuing profligate nations it’s breaking a rule of the euro’s founding treaty and undermining its credibility. Policy makers are also divided over the best course of action, with Bundesbank President Jens Weidmann among those opposing the bond program.

Economic Threat

The central bank is acting in part because governments have yet to ratify a plan to extend the scope of a 440-billion euro rescue facility to allow it to buy bonds and inject capital into banks. Markets tumbled last week on concern policy makers aren’t acting fast enough.

The funding difficulties of banks was one reason cited by Morgan Stanley economists Aug. 17 for cutting their forecast for euro-area economic growth this year to 0.5 percent next year, less than half the 1.2 percent previously anticipated. They now expect the ECB to reverse this year’s rate increases, returning its benchmark to 1 percent by the end of next year.

The economic threat is greater in Europe because consumers and companies are more reliant on banks for funding than their U.S. counterparts, said Tobias Blattner, a former ECB economist now at Daiwa Capital Markets Europe in London. He says the ECB should eventually try to hand over fire-fighting duties either to governments, who would then inject capital into financial firms, or national central banks, who could provide short-term loans to lenders.

‘Uncharted Territory’

Longer-term solutions may involve the restructuring the debt of cash-strapped nations in a way that doesn’t roil bank balance sheets, potentially in lockstep with a European version of the U.S.’s Troubled Asset Relief Program.

Lena Komileva, Group-of-10 strategy head at Brown Brothers Harriman & Co. in London, said the central bank may have no option but to extend the backstop role it is playing for periphery banks to lenders elsewhere. Refusal to do so would risk a European bank default by the end of the year, she said.

“Markets are back in uncharted territory,” said Komileva. “The crisis is a whole new story now.”

We’ve Been Warned: The System Is ready to Blow

New-York-stock-exchange

Traders work at the New York Stock Exchange on 9 August. Photograph: Stan Honda/AFP/Getty Images

For the past two centuries and more, life in Britain has been governed by a simple concept: tomorrow will be better than today. Black August has given us a glimpse of a dystopia, one in which the financial markets buckle and the cities burn. Like Scrooge, we have been shown what might be to come unless we change our ways.

There were glimmers of hope amid last week’s despair. Neighbourhoods rallied round in the face of the looting. The Muslim community in Birmingham showed incredible dignity after three young men were mown down by a car and killed during the riots. It was chastening to see consumerism laid bare. We have seen the future and we know it sucks. All of which is cause for cautious optimism – provided the right lessons are drawn.

Lesson number one is that the financial and social causes are linked. Lesson number two is that what links the City banker and the looter is the lack of restraint, the absence of boundaries to bad behaviour. Lesson number three is that we ignore this at our peril.

To understand the mess we are in, it’s important to know how we got here. Today marks the 40th anniversary of Richard Nixon’s announcement that America was suspending the convertibility of thedollar into gold at $35 an ounce. Speculative attacks on the dollar had begun in the late 1960s as concerns mounted over America’s rising trade deficit and the cost of the Vietnam war. Other countries were increasingly reluctant to take dollars in payment and demanded gold instead. Nixon called time on the Bretton Woods system of fixed but adjustable exchange rates, under which countries could use capital controls in order to stimulate their economies without fear of a run on their currency. It was also an era in which protectionist measures were used quite liberally: Nixon announced on 15 August 1971 that he was imposing a 10% tax on all imports into the US.

Four decades on, it is hard not to feel nostalgia for the Bretton Woods system. Imperfect though it was, it acted as an anchor for the global economy for more than a quarter of a century, and allowed individual countries to pursue full employment policies. It was a period devoid of systemic financial crises.

Utter mess

There have been big structural changes in the way the global economy has been managed since 1971, none of them especially beneficial. The fixed exchange rate system has been replaced by a hybrid system in which some currencies are pegged and others float. The currencies in the eurozone, for example, are fixed against each other, but the eurofloats against the dollar, the pound and the Swiss franc. The Hong Kong dollar is tied to the US dollar, while Beijing has operated a system under which the yuan is allowed to appreciate against the greenback but at a rate much slower than economic fundamentals would suggest.

The system is an utter mess, particularly since almost every country in the world is now seeking to manipulate its currency downwards in order to make exports cheaper and imports dearer. This is clearly not possible. Sir Mervyn King noted last week that the solution to the crisis involved China and Germany reflating their economies so that debtor nations like the US and Britain could export more. Progress on that front has been painfully slow, and will remain so while the global currency system remains so dysfunctional. The solution is either a fully floating system under which countries stop manipulating their currencies or an attempt to recreate a new fixed exchange rate system using a basket of world currencies as its anchor.

The break-up of the Bretton Woods system paved the way for the liberalisation of financial markets. This began in the 1970s and picked up speed in the 1980s. Exchange controls were lifted and formal restrictions on credit abandoned. Policymakers were left with only one blunt instrument to control the availability of credit: interest rates.

For a while in the late 1980s, the easy availability of money provided the illusion of wealth but there was a shift from a debt-averse world where financial crises were virtually unknown to a debt-sodden world constantly teetering on the brink of banking armageddon.

Currency markets lost their anchor in 1971 when the US suspended dollar convertibility. Over the years, financial markets have lost their moral anchor, engaging not just in reckless but fraudulent behaviour. According to the US economist James Galbraith, increased complexity was the cover for blatant and widespread wrongdoing.

Looking back at the sub-prime mortgage scandal, in which millions of Americans were mis-sold home loans, Galbraith says there has been a complete breakdown in trust that is impairing the hopes of economic recovery.

“There was a private vocabulary, well-known in the industry, covering these loans and related financial products: liars’ loans, Ninja loans (the borrowers had no income, no job or assets), neutron loans (loans that would explode, destroying the people but leaving the buildings intact), toxic waste (the residue of the securitisation process). I suggest that this tells you that those who sold these products knew or suspected that their line of work was not 100% honest. Think of the restaurant where the staff refers to the food as scum, sludge and sewage.”

Finally, there has been a big change in the way that the spoils of economic success have been divvied up. Back when Nixon was berating the speculators attacking the dollar peg, there was an implicit social contract under which the individual was guaranteed a job and a decent wage that rose as the economy grew. The fruits of growth were shared with employers, and taxes were recycled into schools, health care and pensions. In return, individuals obeyed the law and encouraged their children to do the same. The assumption was that each generation would have a better life than the last.

This implicit social contract has broken down. Growth is less rapid than it was 40 years ago, and the gains have disproportionately gone to companies and the very rich. In the UK, the professional middle classes, particularly in the southeast, are doing fine, but below them in the income scale are people who have become more dependent on debt as their real incomes have stagnated. Next are the people on minimum wage jobs, which have to be topped up by tax credits so they can make ends meet. At the very bottom of the pile are those who are without work, many of them second and third generation unemployed.

Deep trouble

A crisis that has been four decades in the making will not be solved overnight. It will be difficult to recast the global monetary system to ensure that the next few years see gradual recovery rather than depression. Wall Street and the City will resist all attempts at clipping their wings. There is strong ideological resistance to the policies that make decent wages in a full employment economy feasible: capital controls, allowing strong trade unions, wage subsidies, and protectionism.

But this is a fork in the road. History suggests there is no iron law of progress and there have been periods when things have got worse not better. Together, the global imbalances, the manic-depressive behaviour of stock markets, the venality of the financial sector, the growing gulf between rich and poor, the high levels of unemployment, the naked consumerism and the riots are telling us something.

This is a system in deep trouble and it is waiting to blow.

Gerald Celente: The Entire System Is Collapsing

The number of people filing new claims for jobless benefits jumped last week after three straight declines, another sign that the pace of layoffs has not slowed. Gerald Celente says that there is no way governments can just keep pumping money into the economy and it will only get worse, with an eventual crash.

The Future of Europe: A Stronger Union or a Smaller One?

european union 2011

The E.U. logo reflects in a window opposite the European Central Bank's headquarters in Frankfurt on Aug. 09, 2011

It may be called the European Union, but at least part of that name is being called into question. The market convulsions of the past week are clearly about short-term concerns, about the balance sheets of countries like Italy, Spain and even France. But they’re also about a problem with a more distant horizon: Does the E.U. still make sense in its current form?

As long as that question remains unanswered, uncertainty is bound to continue. Short-term measures, like the propping up of Spanish and Italian bonds by the European Central Bank “are quick fixes that smooth things over the short term,” says Stephen King, chief economist at HSBC in London. “But they don’t answer the questions the markets are asking: What are the political and fiscal arrangements that would create stability in the future?”

The trouble is one that was identified long ago. The E.U. has created a single currency, but it hasn’t forged a deeper political or fiscal union. The result has been the creation of a system that yokes individual countries to a single unified monetary policy, without allowing for the transfer of funds that would allow the union’s member states to ride out the distortions that setup can create. As a result, consensus is mounting that the current situation is simply not sustainable. The E.U., says a rising chorus of voices, needs either to be strengthened, or it will break apart. “What needs to happen is that there’s an honest recognition that those two choices exist and that a choice has to be made,” says King. “Pretending we’re going to muddle through just won’t work.”

The E.U., as is stands, “is a fair-weather construction,” says Emma Bonino, the vice president of the Italian Senate and a former commissioner at the E.U. “It works only in the absence of economic trouble.” The solution, she argues, is the further centralization of political power. Such a move wouldn’t have to be the creation of a single European superstate along the lines of the U.S. Bonino herself has proposed an intermediate solution, in which member states cede only some of their powers — such as foreign policy, defense and border control. Most crucially, it would include a Finance Ministry in charge of economic stabilization, and, when needed, transfers of funds from the central government to individual states. The common political identity, she argues, would make the necessary redistribution more palatable. “Help normally comes only if there is a shared feeling of belonging,” she says.

The other possibility — argued most loudly in Germany, where anger is mounting about taxpayers being forced to bail out less-responsible countries like Greece or Ireland — is to start to break the union apart. “It is better for all concerned, in particular for Greece, if the country leaves the euro temporarily,” Hans-Werner Sinn, an influential economist at the University of Munich, wrote in a recent essay. The weaker country would be free to devalue its currency and begin to regain its competitiveness. The rest of the E.U. wouldn’t be forced to come to its assistance. Even Otmar Issing, a former member of the European Central Bank and one of the driving forces behind the single currency, has warned against the rushed strengthening of the union. A proponent of European integration who once famously cautioned that “there is no example in history of a lasting monetary union that was not linked to one state,” Issing now worries that a bailout of Europe’s less solvent members would lead to “fiscal indiscipline” and even unrest by taxpayers furious over being forced to sacrifice when others didn’t.

Both choices have historical precedents, says HSBC’s King. After the collapse of the Soviet Union, countries that for decades were united under a single political authority suddenly weren’t. Many of the newly formed, previously Soviet republics first tried to keep using the Russian ruble. But soon, in a development that should give pause to anybody watching the E.U., the economic discrepancies between the various economies became too great. And the single currency fell apart.

A model for the alternative scenario is the E.U. itself. Before the introduction of the euro, the European Community had introduced a currency mechanism intended to reduce the variability in exchange rates between the various member countries. In 1992, however, that system began to fail. In a sequence of events that would seem familiar to anyone watching the markets this week, speculation sent the market into a frenzy. The U.K., which had joined the mechanism two years earlier, hastily withdrew. The other countries drew the opposite lesson and pledged to move toward closer economic integration. “The single currency wouldn’t have happened without that crisis,” says King. “The crisis reveals the choice, and the choice has to be made.”