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Thursday, March 29, 2012

EU can live on without the euro


By ROBERT J. SHILLER

NEW HAVEN, Connecticut — Great significance — probably too much — has been attached to a possible breakup of the eurozone. Many believe that such a breakup — if, say, Greece abandoned the euro and reintroduced the drachma — would constitute a political failure that would ultimately threaten Europe's stability. Speaking before the Bundestag last October, German Chancellor Angela Merkel put the matter starkly:

"Nobody should believe that another half-century of peace and prosperity in Europe is guaranteed. It is not. So I say: If the euro fails, Europe fails. That must not happen. We have a historical obligation to protect by all prudent means at our disposal Europe's unification process begun by our forefathers more than 50 years ago after centuries of hatred and spilling of blood. None of us can foresee what the consequences would be if we were to fail."

Europe has had more than 250 wars since the beginning of the Renaissance in the mid-15th century. So, it is not alarmist to worry aloud about preserving the sense of community that Europe has enjoyed for the past half-century.

In a fascinating, but largely overlooked book, "How Enemies Become Friends," Charles A. Kupchan reviews many historical case studies of how nation-states with a long history of conflict managed eventually to become secure and peaceful friends. His examples include the formation of the Swiss Confederation (1291-1848); the creation of the Iroquois Confederation in the century or so before the first Europeans arrived in America; the establishment of the United States (1776-1789); the unification of Italy (1861), and of Germany (1871); the Norway-Sweden rapprochement (1905-1935); the formation of the United Arab Emirates (1971); and the Argentine-Brazilian rapprochement of the 1970s.

Kupchan also examines some notable failures of friendship: the United States' Civil War (1861-65); the end of the Anglo-Japanese Alliance (1923); the breakdown of Sino-Soviet relations (1960); the demise of the United Arab Republic (1961); and the expulsion of Singapore from Malaysia (1965).

Kupchan never mentions a common currency as a condition of comity among nations; in fact, economic integration tends to follow, rather than precede, achievement of political unity. Rather, he regards diplomatic engagement as the essential element to strategic accommodation and mutual trust, and this is more easily accomplished if the states have similar social orders and ethnicities.

But Kupchan's analysis implies that a common currency can help nation-states to build lasting friendships, for he argues that friendship-building is most secure after an identity-changing "narrative" takes root, leading to a sense that the nations are like members of a family. A common currency can help to generate such a narrative.

For example, the Iroquois tell the story of a great warrior and skilled orator named Hiawatha, who, traveling with the mystic Deganawidah, negotiated the treaties that established their confederation. He advocated new condolence ceremonies to commemorate lost warriors — and to replace wars of vengeance.

The new narrative was reinforced with physical symbols, akin to a currency or a flag, in the form of belts of beads made of wampum, the Iroquois' money. A surviving Hiawatha belt, dating from the 18th century (and probably a copy of earlier belts), contains symbols of the five nations — Seneca, Cayuga, Onondaga, Oneida, and Mohawk — much as the U.S. flag contains stars representing each of its states. The belt also preserves Hiawatha's status as the confederation's forefather.

Flags may be a more inspiring symbol of common destiny, but most of us do not carry them around, and many people never display them, except perhaps at major sports events; their origin, rooted in battle standards, can seem uncomfortably aggressive. There is a European Union flag, but it is rarely seen anywhere but outside of EU government buildings.

A British schoolteacher expressed the sentiment well in 1910: "We suspect the man who talks patriotism and imperialism, just as we suspect him who talks religion or any of the things that are of deepest value in life. We think him either a humbug or a shallow person who has not realized the inadequacy of words to express what is deepest."

And yet national currency, which we display every time we make a cash purchase, arouses no such suspicions. So currency works as a constant, if latent, reminder of identity. In using it, one has the psychological experience of participating with others in a common venture, and thus developing a sense of trust in both the endeavor and one's fellow-participants.

Every currency union chooses symbols of common cultural values for its coins and notes, and these symbols become part of the sense of shared identity. We see the human faces on the notes so often that they come to seem like family, creating what the political scientist Benedict Anderson called the "imagined community" that underlies and sustains a sense of nationhood.

The euro notes feature bridges as they appeared throughout Europe in various epochs, rather than images of actual structures that might seem to imply preferential regard for some countries. The town of Spijkenisse in the Netherlands is now in the process of building all seven bridges depicted on the euro notes. But the bridges remain symbols of European culture, in which presumably all Europeans share.

Modern electronic technology will not eliminate paper notes and coins soon, so there is still plenty of time to make use of the symbolic value of a common currency. Indeed, even if the eurozone breaks up, each European country could adopt a different currency but retain common symbols. For example, there could be a Greek euro, a Spanish euro, etc. The notes could even show the same pictures of bridges.

Even electronic transactions should be able to generate symbols of peace, trust, and unity. The point is that if Europe can keep these symbols alive, even a eurozone breakup would not have the dire political consequences for Europe that so many predict.

Robert J. Shiller, a professor of economics at Yale University, is coauthor, with George Akerlof, of "Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism." © 2012 Project Syndicate


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