European debt crisis puts more than just money at stake

When Britain turned its back Friday on a new treaty tying the finances of European Union countries more closely together, it highlighted a deep divide that runs through more than just the EU economy.

While much of the public debate and discourse around the European debt crisis has focused on finance, money and numbers, there are also other long-standing social and political forces at play. In many ways, the country known for holding a strong degree of euroscepticism was simply acting in character when it decided not to back the new treaty, and it's an example of the difficulties the EU will continue to grapple with as it tries to put its economy back in order.

'This is an expression of British identity.' —Philip Giurlando

"This [decision] is an expression of British identity," says Philip Giurlando, a European Union expert at Queen's University in Kingston, Ont.

"There is no sense of 'belongingness' among most of Britian's political [leaders] and voters for Europe."

That's one one of the fundamental differences that divides the EU. Among Britain's political classes and voters, the EU is fundamentally perceived as a kind of glorified free trade zone, Giurlando says.

"There is a … weak or absent sense of solidarity, whereas among other European nations and the original architects of the European project — the intellectuals that is — it wasn't meant to be this glorified trade zone. It was meant to become a state.

"This is fundamentally rooted in culture. These are just cultural differences between Britain and France and Germany and Italy and everybody else."

"Reflect national identities'

Money has its role in day to day transactions happening everywhere from the corner store to the stock market, but for many it has traditionally been one of the building blocks of national identity.

Before the euro went into circulation a decade ago, there was a physical manifestion of the differences among European nations that was visible in everyday commerce. The British kept the pound, but the euro common currency replaced the French franc, the German mark, the Italian lira and other European currencies.

So, to what extent did those currencies reflect the differences among the nations and their approach to fiscal policy?

"National currencies do reflect national identities in the sense that they kind of encapsulate the collective decisions, values, hopes and fears of a nation," says Guirlando.

Look at the lira, he suggests, pointing to the Italian currency that was often devalued and became something of a laughing-stock as far as currencies go.

"The lira was associated with Italian incompetence, so this certainly influenced the enthusiastic attitudes of many Italians toward the euro."

But things have changed in Italy in the 10 years since the adoption of a common currency. Now, he says, many Italians regret the move to the euro, feeling that since it arrived, the standard of living has declined and incomes don't go as far.

He notes that while the increases can be at least partly attributed to larger changes in the worldwide economy, economists estimate that the conversion to the euro increased prices from 15 to 30 per cent for some goods. "A lot of businessmen did take advantage of the conversion to increase prices on a range of goods."

Practical vs. emotional attachment

Kul Bhatia, an economics professor at the University of Western Ontario in London, believes that any attachment Europeans have to currency these days is more a result of these sorts of practical issues tied to financial security than emotional concerns about national identity. 

He points to the shifting views on the euro in various European nations. When the economic times were good in countries such as the Netherlands, there was pride in the euro. Now, at the same time as the economy has taken a massive downturn, there are polls suggesting 60 to 70 per cent of the Dutch would like a return to the guilder.

"I think it is how they are perceiving the potential economic gain rather than reclaiming part of their identity," says Bhatia.

Larry Elliott, The Guardian's economics editor, wrote Dec. 10 that the British pound "is still a national virility symbol even though sterling has fallen in value steadily over the past century, often in set-piece devaluations as in 1931, 1949, 1967 and 1992."

But that doesn't mean there is a deep-seated psychological devotion to the pound behind the UK's current financial philosophy when dealing with the rest of Europe, he suggests.

"The reason for the U.K. not joining the single currency has very little to do with emotional attachment and much more to do with the costs involved," he wrote.

"These include losing the ability to set interest rates at a level deemed appropriate and no longer be able to use the currency as a shock absorber when times get tough. The experience of Greece, Ireland and Portugal shows how countries are forced to accept extremely severe doses of austerity when they give up their monetary independence."

While Bhatia sees a time a few generations ago when the pound would have been an integral part of the country's identity, for example, now he sees little to suggest the current loyalty has any real emotional or cultural component.

"That's strictly the British take on economic policy. I don't think it has much to do with identity."

'Absolve its past sins'

Still, Guirlando says national identities, histories and "discourses" do continue to affect the approach European nations are taking to the current euro crisis, and it's one of the reasons that forging agreements on EU fiscal policy has proven so difficult.

"Germany looks at the European Union as a way to absolve its past sins because there's a strong sense of guilt for past Nazi atrocities. Italy looks to the Europe because it wants to transfer sovereignty to Brussels, because sovereignty is perceived to be misused in Rome. The French look to Europe as a way to expand French civilization, etc."

The national identities of the largest European countries have a particularly strong influence, says Guirlando. As he sees it, that means that the euro, and the policies around it, are in many ways the German Deutschmark "writ large."

 "The central bank is in Frankfurt. That's not a coincidence," he says. And he points out that the criteria for entering the euro were largely constructed on principles Germany strongly emphasized, such as responsible public finance, low deficits and low inflation. With the latest development out of Europe, Guirlando sees a movement toward a stronger fiscal union.

"A fiscal union in effect means German rules, and it's also important to keep in mind that German rules are rooted in Germany's history and Germany's consciousness, the guilt of the Nazi atrocities, the devastation of the Great Depression, and the inflation.

"This is what is in the background, and this is what has made Germany one of the most fiscally responsible countries in the world and the most fiscally responsible in Europe, and one of the reasons why Germany emphasizes rules over political control."

To save the euro, Guirlando suggests European nations will ultimately have to become 'more German' in how they manage their public finances.

"So the question right now is whether countries like Greece, Spain and Portugal want to be Germanized. If they don't, they're going to have to leave the euro. And if they do, things might work out."