Is the cost of saving the euro beyond reach?

Tuesday, April 5, 2011
By Paul Martin

Japan’s earthquake is sending shockwaves through Europe’s political structures

By Jeremy Warner
Telegraph.co.uk

According to chaos theory, the flap of a butterfly’s wings in Brazil can set off a tornado in Texas. The Tohoku earthquake and tsunami in Japan can hardly be regarded as examples of “the butterfly effect”, where small events can have dramatic and unpredictable consequences; this was no small event. Yet as is ever more apparent, the fallout is being felt in startling ways far beyond the narrow confines of the Japanese economy.

One of its most bizarre effects has been to produce a landslide defeat for Angela Merkel’s Christian Democratic Union in regional German elections. Overnight, a poll that was largely about German unhappiness with support for the eurozone’s peripheral nations was transformed into a vote on the future of nuclear power. Fukushima eclipsed antipathy towards the bailouts. There were, of course, a number of very local issues involved, too, but it was basically Japan that determined the outcome. That, in turn, could have big consequences for the future of Europe, for although the parties that gained at the CDU’s expense all substantially share Mrs Merkel’s view that the euro must be saved, the chancellor’s room for manoeuvre – not just on nuclear, but on Europe and just about everything else – has been severely compromised.

She has become a lame-duck head of state who will in future largely be limited to no more than defending and pursuing the majority German view; on Europe, that means no transfer union, no European bonds and no further expansion of the bailout fund. There’s no public support for these things in the country, and they are in any case against its constitution. Mrs Merkel must now pay more than just lip service to the no-bailout principle. She can no longer drag her voters kicking and screaming behind her in pursuit of ever greater European solidarity.

Where does that leave the single currency? Well, much is written and said about Europe’s inability to grip the crisis, but in its lumbering, compromised and dysfunctional manner, the EU has in fact come an awfully long way in a comparatively short space of time. The truly remarkable thing, given the diversity of political constituencies involved, is quite how much has been agreed, rather than how little.

Many things that were unthinkable before the crisis – a financial stability mechanism, a proper system of surveillance, European Central Bank support for banking systems and bond markets, and a new set of governance rules – have in short order become part of the architecture of the single currency.

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