Commentary May 20, 2010, 1:30PM EST

Commentary: Come Together

The euro zone's crisis can only be solved by unity, says ECB President Jean-Claude Trichet. So why is everyone talking about blowing it up?

By Peter Coy

Anyone trying to predict the outcome of Europe's financial crisis should pay close attention to Jean-Claude Trichet. As head of the Bank of France in 1999, he helped create the euro. After seven years babysitting the new specie as president of the European Central Bank in Frankfurt, Trichet and the euro are as intertwined as a man and a currency can be. He is too invested to let it break apart on his watch.

Whatever emotional tug the 67-year-old Trichet may feel, though, is counterbalanced by his devotion to sound money and central bank independence. He doesn't want to debase the euro just to keep shakier members of the zone on board. Even as the financial crisis spiraled out of control, he refused to support weak governments—Greece, Spain, Portugal—by buying up their debt. That restraint burst on May 10. A run on Greek government bonds had begun to spill over into Portuguese, Spanish, and even Italian sovereign debt, raising fears of a self-feeding downward spiral. That day, Trichet reversed course and announced the ECB would begin buying sovereign bonds after all, "to ensure depth and liquidity." That, along with a 750-billion-euro loan package from EU countries, stopped the run and gave the euro some breathing room.

Skeptics and speculators are already questioning whether it was enough. What had been unthinkable—a partial dissolution of the euro zone—is now openly debated. The euro has lost 18 percent of its value since November, 7 percent in the last month alone. As Trichet sees it, there is only one way to guarantee that the euro remains strong and the bloc stays intact: Europe must integrate more tightly than ever.

Having grudgingly extended a lifeline to Greece and other shaky economies, Trichet wants to make sure the debtor nations follow through on their promised austerity measures. He's pushing a plan that would require them to submit their annual budgets to the scrutiny of their peers and ratchet up the penalties on countries whose budgets do not pass muster. Trichet told Der Spiegel that Europe needs "a quantum leap in the governance of the euro area."

It's an open question whether Europe can muster the goodwill, and the willpower, to come together in the way Trichet believes is required. German citizens are already angry at Greeks for dragging their currency down and sucking money from their coffers. For Greece, the price imposed by the EU and the International Monetary Fund for continued euro zone membership is a long walk over hot coals—deep budget cuts, steep tax hikes. "What the IMF is asking Greece to do borders on insanity. It's going to drive Greece into a deep recession and increase its debt-to-GDP ratio," says Desmond Lachman, a resident fellow of the conservative American Enterprise Institute in Washington.

European leaders from Germany to Greece are making it clear they won't let the euro zone fracture without a fight. They believe the euro is worth preserving because it encourages trade and investment among the 16 member nations while promoting financial and geopolitical stability. European multinationals such as Airbus are among the euro's strongest supporters. And from adversity comes a measure of unity: Faced with an existential threat, European political leaders have agreed to risk-sharing measures that were politically impossible in calmer times. The nearly $1 trillion in loans and guarantees announced on May 10 is the best example of this newfound cohesiveness. To the optimists, this painful time is not the death throes of a failed monetary experiment but the birth pangs of a new federation. "We were close to a very, very significant risk of collapse," French Finance Minister Christine Lagarde told CNN after the rescue. "I do think that it's restored credibility and that was the issue."

Her unspoken message: If the euro zone goes, it won't go quietly. German Chancellor Angela Merkel isn't playing around, either. Her government banned traders from buying so-called naked shorts, default protection on government bonds they don't own. Investors, wondering if Merkel knew something they didn't, started selling again.

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