Eurozones one-size-fits-all approach strains European states

The Associated Press ~ staff The News
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BRUSSELS, Belgium - The euro is in a rough spot. And it could be there for years.
The economic and financial crisis has ballooned budget deficits in Greece, Ireland and several other member countries - exposing one of the underlying vulnerabilities of Europe's decade-old experiment in a multinational currency.
While few think the 16-country currency zone will actually break up, holding it together through the unfolding debt crisis will mean painful, unpopular measures such as budget cutbacks and higher taxes.
German Chancellor Angela Merkel said in a speech Wednesday that "the euro is in a very difficult phase for the coming years."
And Daniel Gros, director of the Centre for European Policy Studies in Brussels, foresees "lean years ahead and there is very little that European leaders can do about it."
Jean-Claude Trichet, the head of the European Central Bank, faced several questions at his monthly press conference last week about the possible breakup of the euro. He brusquely dismissed them: "I do not comment myself on absurd hyptheses."
The problem: The eurozone has one currency and one central bank, the Frankfurt-based ECB - but 16 governments.
Before the euro, the governments went their own way on spending. But since big budget gaps can undermine a currency, the euro members agreed deficits should stay below 3 per cent of a country's economic output every year.
So forecasts that Greece's 2009 deficit was set to hit at least 12.5 per cent of gross domestic product, and Ireland's 11.7 per cent have spread shock waves. Both countries have announce plans to cut spending and raise taxes.
More trouble is ahead as the euro's states suffer very differently from the crisis, with Spain's jobless rate hitting 19.4 per cent in November - the most recent figures available - far ahead of 3.9 per cent in the Netherlands.
It will be a challenge for the European Central Bank to find one interest rate to stimulate laggards and, at the same time, prevent inflation in growing economies.
The pain level is already high enough that a few voices are asking whether it's worth it.
Irish economist David McWilliams is advocating the end of his country's "loveless marriage" with the currency.
That would let Dublin instantly devalue its currency to make exports more competitive. It could also attract jobs to Ireland through comparatively cheaper wages.
"We need a break. We can't keep cutting expenditure when there is no offsetting stimulus coming from a cheaper exchange rate, which allows the trading sector to grow," McWilliams wrote in Ireland's Sunday Business Post newspaper on Jan. 10
But the Irish government is adamant that it won't leave - winning praise from EU officials for massive cutbacks to public spending, cutting government wages 10 per cent and demanding every worker pay at least 1 per cent last year to plug the budget gap.
Not all is negative. The euro weathered the first months of the crisis well. Membership spared Greece and Ireland the currency devaluations that savaged nonmembers Hungary, Iceland, and Ukraine.
Indeed, the euro's exchange rate has remained strong, at times rising in value as investors turned to it when the dollar tumbled. It traded around $1.44 on Friday.
Russia's reserve holdings of euro outweighed dollars for the first time last year. Ukraine even asked Russia to pay recent gas transit fees in euros, not dollars.
And quitting would not be pretty, according to Barry Eichengreen, an economics professor at the University of California, Berkeley. In a September 2009 paper for the International Monetary Fund he describes a currency devaluation that would scare investors and devastate savings.
"A systemwide bank run would certainly follow," he wrote. "This would be the mother of all financial crises. And what sensible government would willingly court this danger?"
Gros at the Centre for European Policy Studies says the current course of making cuts to bend to the EU rules is "the lesser evil."
He sets little store on frantic plans by EU officials to draw up a recovery strategy that promises to generate jobs by making labour markets more flexible, knocking down barriers to business between European countries and focusing on a green, innovation-based economy.
Down the road, the medicine offered by the EU's executive commission may work - but the immediate costs may be hard to bear.
Denmark is touted as a model for Europe with a "flexicurity" system that allows businesses dismiss workers at short notice, gives generous welfare benefits to the unemployed and encourages them to retrain for other jobs.
Following that example and scrapping some labour market rules that make it expensive for companies to hire and fire workers - will likely raise hackles among trade unions in Spain, Italy and France.
Gros sees these only as solutions for the long term.
"There's nothing that can really give a boost in the short run to overcome the effects of this crisis, but that is something that policy makers cannot accept publicly," he said. "This is very painful process which will take a long time."

Organizations: University of California, European Central Bank, European Policy Studies EU Business Post International Monetary Fund

Geographic location: Ireland, Greece, BRUSSELS Europe Belgium Spain Ukraine Netherlands Russia Dublin Hungary Iceland Berkeley Denmark Italy France

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