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WASHINGTON--Europe's economic struggles are a consistent drag on American growth. A eurozone breakup, in chaos and acrimony, could be a Lehman-like shock of incalculable damage.
For years, the stronger European economies have managed to bump along from challenge to challenge--providing bailouts to the improvident in exchange for fiscal restraint and reform, while reassuring credit markets in an elaborate confidence game.
But the fundamental problem has never been resolved. Europe is a monetary union without being a fiscal union. Germany has become the continent's rich uncle, vouching for the credit and covering the debts of distant relations without authority over their spending habits.
German patience with this arrangement is now being tested on Greece. It would be possible for Europe to maintain Greece--just
But Greece is a living, breathing moral hazard. What message would it send to Italy, Spain, Ireland, and Portugal--all undertaking difficult austerity programs--if the European Union provided special treatment to its least trustworthy member? Many Germans believe that Greece entered the EU on the basis of false economic figures in the first place. Should German taxpayers now assume permanent responsibility for a political system apparently incapable of responsibility? The birthplace of democracy seems to lack a working one.
So Europe seems to be preparing for the departure of Greece from the euro--kicking the dependent out of the house to live on his own. For many months, German and French banks have been quietly offloading Greek liabilities. European finance ministries are beginning to plan for an event with no legal precedent or procedure.
The Greek return to a devalued drachma would probably not be disastrous (except for Greeks), so long as the damage is containable. Credit markets--having tested Greek political will and found it wanting--would press Portugal, Italy, and Spain. Any sign of weakness would push their borrowing costs to astronomical, unsustainable levels. The trick will be for the EU to construct a firewall of long-term confidence--a reasonable conviction among investors that other economies are on a responsible, sustainable path.