Greece is a pawn in fight between France, Germany by W. Watts (Market Watch)

There are two factors that must be remembered to make sense of the long-running eurozone debt crisis.

The first, and better known, is that the euro is a very flawed currency. As has been noted repeatedly since before the first euro note ever rolled off a printer, it is very hard to share a currency without also sharing fiscal policy.

The second is that the shared currency was always first and foremost a political, rather than an economic, project. It was part of the dream held by postwar European politicians, including giants like former French President François Mitterand and Germany’s Helmut Kohl, who viewed an evermore united Europe as the best way to inoculate the continent against another devastating war.

But despite a genuine desire for a peaceful and integrated postwar Europe, political and economic rivalries didn’t disappear.

At the risk of oversimplification, Germany and France have long been jealous of one another. While the countries both recovered rapidly from World War II, Germany’s economic miracle was a source of envy for France. In particular, French officials resented the primacy of the Bundesbank, Germany’s central bank, which served to dictate monetary policy across much of Western Europe.

At the same time, many German politicians resented playing what seemed like second fiddle to Paris when it came to European affairs and global diplomacy. While Germany remains somewhat ambivalent about what it is role should be in the world, some Germans saw the euro as a way to co-opt France’s political primacy in Europe.

In other words, Germany thought it was putting one over on France, and vice versa.

It was a troubling scenario, as was noted by economist Martin Feldstein back in 1997: “What is clear is that a French aspiration for equality and a German expectation of hegemony are not consistent. Both visions drive their countrymen to support the pursuit of EMU, and both would lead to disagreements and conflicts when they could not be fulfilled.”

There were bitter fights between France and Germany in the run-up to the launch of the euro. Germany’s desire to limit the euro to a small club consisting of itself, France and some like-minded fiscally austere allies, such as the Netherlands, conflicted with France’s desire for a broader euro.

France, seeking to end the ability of Spain and Italy to competitively devalue at the expense of French exporters, wanted those southern European countries inside the euro.

Germany’s efforts were undercut when a slowdown ensured it missed some of the stringent criteria it had insisted be a test for euro membership. With Germany and France both fudging their way in, there was no way to keep the so-called Club Med countries out.

Those divisions have only deepened. In a weekend of negotiations that came perilously close to seeing a country forced out of the euro, Germany, the Netherlands, Finland and a handful of former Eastern bloc countries sought to play hardball. France and Italy, though wary of Tsipras after his snap decision to call a referendum, lined up on the other side.

While a Grexit was averted, at least for now, it is clear that the eurozone’s ong festering political divisions now rival its fiscal divisions. More political turbulence almost certainly lies ahead.

 

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