The Euro Project’s Knockout Flaw

The European Union (EU) has temporarily solved the crisis involving the euro, the EU’s common currency, by bailing out Greece. Temporarily, because no one believes the problems are over.

Greece, teetering on the brink of bankruptcy, is one of the 16 countries which use the common currency. To stop its financial problems from dragging the euro down, the 15 other eurozone countries worked out a €45bn emergency funding plan. They declared that they were prepared, together with the IMF (which is to guarantee a third of the sum), to give Greece a €30bn credit line if interest rates become too high for Athens to borrow the necessary funds on the financial markets. In return, Greece has promised to cut its budget by 10% of its GDP in the next three years. The deal has temporarily restored the markets’ confidence in the euro.

There are at least three reasons for skepticism.

First, it is simply impossible for Greece to cut its budget by 10% of its GDP in three years without having the option of devaluating its currency to make its products cheaper on the international markets. The Economist argues that the €45bn rescue plan has “merely bought time – three years, in effect, to contain the adverse consequences of a possible Greek default.” The magazine states, moreover, that Greece is in need of a rescue plan closer to €75bn.

Second, Greece is not the only eurozone country facing default. The budgetary situation in the other PIGS (Portugal, Italy, Greece, Spain) and Ireland is equally precarious; that in France and Belgium is not much better. How are countries which might soon need help themselves, expected to help Greece? The blind cannot lead the blind. The main reason why France and Belgium agreed to help Greece is because they count on receiving help themselves when in need. Everyone, however, is expecting help from the same country: Germany.

The German newspaper Handelsblatt commented bitterly: “For the Germans it is no longer a question of whether they must pay, but how much.” Public opinion in Germany is just as embittered. Joachim Fels, head of research at Morgan Stanley, warns that the Greek debt crisis is setting off a chain of events that may prompt German withdrawal from the eurozone. “Obviously, we have not reached the end game yet. However, with the latest developments, such a break-up scenario has clearly become more likely,” he wrote in a note to clients.

George Soros even thinks that not just the euro, but also the EU itself risks breaking up. “The Germans have always made the concessions needed to advance the European Union, when people were looking for a deal. Not anymore,” he told the Italian newspaper Corriere della Sera. “That’s why the European project has stalled. And if it can’t go ahead from here, it will go backwards. It’s important to understand that if you don’t make the next steps forward for the euro, the euro will go to pieces and the European Union, too,” he said.

Third and most important, however, is the basic flaw of the euro project. It is economically flawed because it is politically flawed, and it politically flawed because, as the Dutch professor Jaap Koelewijn pointed out, it is culturally flawed. The euro is doomed to fall because of insuperable cultural differences.

Ten years ago, the common currency was introduced for political reasons. The aim was to foster the political unification of the EU member states by removing economic barriers, such as different currencies, that existed between these states. This plan might have worked if the European states, especially those from the (predominantly Protestant) north and the (predominantly Catholic) south (plus orthodox Greece) had shared the same culture.

In the southern countries, governments are characterized by a higher degree of corruption, which is generally accepted and, up to a point, even considered benevolent and beneficial, because it is compensated by the government’s inefficiency and sloppiness in collecting taxes. The southern citizens do not expect much from the state, but the state does not expect much from them either. Southerners do not trust the government, but the political system works and is not even perceived to be oppressive because the state in return adopts a laissez faire attitude: it does not worry about being cheated by the citizens. Outwitting the taxman is generally accepted behavior and may even make a man so popular that he can rise to the political top. This is what happened with Silvio Berlusconi in Italy.

Before the euro was introduced, the states in Southern Europe made up for their losses in taxes by occasionally devaluating the currency as a method of indirect tax collection. The introduction of the euro, however, has made the latter impossible, and has put pressure on the governments in the south to improve their efficiency in collecting taxes. As the latter would make these governments hugely unpopular – by breaking the existing modus vivendi, a workable system which so far had not been perceived to be politically oppressive, they would in fact become oppressive – they preferred to accumulate huge budget deficits. When the euro was introduced, the EU authorities imposed upon the eurozone countries the obligation to keep their budget deficit below 3% of GDP and their government debt below 60% of GDP. To hide their real performance from the EU authorities, the southern governments cheated and fixed the figures in the same way that their own citizens had always been allowed to cheat.

The EU is now forcing the Greek government to clamp down on its citizens in a fashion which is incompatible with the political culture in Greece. If Greece fails to do so, the Germans will be forced to bail them out. The latter, however, is perceived by German taxpayers, who rebel against being forced to pay for the “cheating Greeks,” as unacceptable political oppression by the EU.

The northerners with their predominantly Protestant ethic expect a “high trust government” in return for not cheating on the government. The EU, however, has imposed on the northerners authorities who have cheated; the EU now expects these northerners to bail those cheaters out. The southerners, on the other hand, expect little from the government but are not expected to do much in return. The EU is now confronting the southerners with authorities which are about to put the fiscal screws on them. It is not clear yet at which end the system will snap – either the Germans (and the Dutch and the Finns) leave the eurozone, or the Greeks (and the other PIGS) are forced out – but that the system will have to give at some end seems certain. When culture clashes with monetary politics, culture is bound to prevail.

Romance # 2

@ Kapitein

I insist.  Belgium lies on the Germanic-Romance border in Europe and, yes, northerners can be romantic occasionaly. 

As to the Flemish "choosing", I would say that Belgium was born in pre-democratic times (1820's) on the European continent.  The average un-emancipated Flemish person had a hard time "choosing" anything 'political' in those days. Flemish political emancipation came rather late, and required two American 'interventions' in European wars.  One-man-one-vote became possible in Belgium only after ww1 (a pre-condition for the Flemish to be willing to fight for the francophone king and country against the German Kaiser).  And one-man-one-vote became possible for women only after ww2.  It could be said that Flemish political 'maturation or adulthood' barely preceded Congolese 'independence' by a few years.  Today, the Flemish are much better off than the Congolese - because of their geographic and cultural neighborhood' - but they still do not have political self-determination.  They probably never will in 'Eurabia'.   



RE: Romance



"Romantic" or "Romanic" would work in the context of the Romance languages.  But since when have Northerners been romantic?  Essex girls, cheating Swedes and random play in German discos come to mind...


I agree with the rest...  I understand that the Flemings joined the Walloons rather than the Dutch because of their Catholicism.  Of course, Catholicism is much less salient politically now then it was in the 19th century.  German unification is indicative of this as Bismarck excluded Austria and worked to marginalize southern Germany.  The Flemings do need to step up to the plate, unless they prefer their non-practicing co-religionists...


@ Kapitein


"Romantic-Germanic cultural boundary? 

That should be Romance-Germanic boundary. No? Northerners can be "romantic".

It is true that Belgium lies on that boundary.  But 'official' Belgium, i.e. the authorities, behave largely as if they are on the southern side of that boundary.  It is a complicated matter, reflecting a complicated history, and partly due to 'poor' decisionmaking in the past by three Germanic nations: Britain, the Netherlands and Germany. But, surely, the main blame today goes to the contemporary 'Germanic' Flemish people themselves, who form a demographic 'majority' in Belgium and who tolerate this 'southern' behavior by their own authorities.

Neither "hesitation" nor Catholicism...

Dear Dr. Belien,




While your article is incisive, I completely disagree that Catholicism is responsible for the sovereign debt cricis in the EMU.  Indeed, it is a north-south divide.  Ireland behaved no less recklessly than Iceland.  The Catholic and former Warsaw Pact countries of East-Central Europe (esp. Poland and initially Hungary) embraced the free market.  Lithuania has accepted austerity with no complaints, and neither southern and northwestern Germany, or Austria, are in the PIIGS camp.  Nor can Eastern Orthodoxy be to blame – look at Estonia and Latvia!




Whereas Switzerland is firmly in the “north”, France tends towards the “south” and Belgium is situated on the Romantic-Germanic cultural boundary…








Germany would benefit from leaving the EMU or forcing Greece and other states to leave it.  Period.




To attribute catholic culture as main reason for the financial failure of the PIIGS countries is a very simplified argumentation. After all, budget deficit below 3% of GDP and government debt below 60% of GDP is a mirage in 'northern' countries as well. Also to characterize Mr Berlusconi as prototype of a corrupt southerner may be right but will not rise many sympathies on the popular right-wing front  - they do love crooks. The Greek bankruptcy was on the horizon for years and is obvious for many weeks. It was the reluctance of Europe's politicians to declare their solidarity in time and establish a temporary credit fond for Greece which would have hindered the rating agencies to downgrade consecutive European countries. The hesitation of German Chancellor Merkel is the prime reason for the eurozone-debacle, the crisis can only be solved by an EU-credit-fond to express solidarity. Of course Germany will pay, because Germany is the first country to benefit from a stable Euro. If not, countries might drop out of the eurozone which will not be a pleasant issue for any country.


A compulsory common currency in Europe was from the beginning a theoretical and fully unrealistic remedy, precisely as we told, if you don't presuppose an European state (ES) instead of EU and you at that add equalizing public finances:

J. E. Vig, M.Sc.(Economics)
Danmark (the English and Deutschen versionen)

Impact on the Belgian State

Paul, excellent analysis of a timely issue. The burning question that remains unasked of course is what impact does this have upon the Belgian state? Specifically, does this force a similar north/south assessment in Belgium with equally irreconcilable political positions spurring along first an economic and later a political disintegration of the state?

de bende van