Bloomberg | May 14, 2010 | 11:47 EDT
Romano Prodi recalls how he persuaded Germany to allow debt-swamped Italy into the euro: support our membership and we’ll buy your milk, he said. When Prodi toured Germany’s agricultural heartland after becoming Italian leader in 1996, he pitched “a big milk pipeline from Bavaria,” pointing to a three-year, 40 percent plunge in the Italian lira that was hurting dairy sales. “To have Italy outside the euro, a huge quantity of exports from Germany would have been endangered,” Prodi, now 70, said. Germany got the message, allowing entry rules to be bent to create a 16-nation market for its exporters. Now, German taxpayers are footing the bill for that permissiveness as Europe bails out divergent economies lashed to a single currency with little control over national taxes and spending.
The consequences are an 860 billion-euro ($1 trillion) bill for a debt binge led by Greece, sagging confidence in the European Central Bank’s independence and mounting speculation that a currency designed to last forever might break apart. “You have the great problem of a potential disintegration of the euro,” former Federal Reserve Chairman Paul Volcker, 82, said yesterday in London. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.” German-led northern Europe, with its zeal for budget discipline, is attempting to fix the mistakes made by the euro’s founding fathers in the 1990s. It is squaring off against the governments of the south over who will control the euro and the ECB; whether the currency will be used to promote growth or squelch inflation, and ultimately, whether some countries should be disbarred from the monetary union.
What was conceived as a club for Europe’s strongest economies was expanded for political reasons, leaving the currency union with minimal powers to police deficit spending and no safety net for dealing with countries, like Greece, that veer toward default. “There was no discussion of that at all, of a crisis