Euro Breakup Precedent Seen When 15 State-Ruble Zone Fell Apart

Photographer: Andrey Rudakov/Bloomberg

Russian ruble currency notes in Moscow. Close

Russian ruble currency notes in Moscow.

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Photographer: Andrey Rudakov/Bloomberg

Russian ruble currency notes in Moscow.

It was a currency union of 15 states in 1992. Two years later, as budget deficits spiraled out of control, hyperinflation reigned and economies shriveled, just two members of the Soviet Union’s ruble zone were left.

As Greek politicians threaten to break terms of the country’s bailout with international lenders, Spain calls for financial help, and northern European nations balk at funding the south, historians are asking whether the euro region is about to face a similar exodus. They take a longer view of the European Union’s crisis than economists, and it’s much bleaker.

The Soviet experience tells us “an exit like this is messy and leads to loss of income and inflation, and people are right to be scared of it,” said Harold James, a professor of history at Princeton University whose books include “The End of Globalization: Lessons From the Great Depression.” “It isn’t an attractive analogy at all because the Soviet Union states all had serious troubles for the whole of the 1990s.”

While differences between the Soviet Union and the EU are greater than their similarities, there are parallels that may prove helpful in assessing the debt crisis, historians say. Both were postwar constructs set up in response to a collective trauma; in both cases, the founding generation was dying out as crisis hit and disintegration loomed.

Forgotten Bond

“The Soviet Union and the European Union both lost a generation that remembered what the union was about, a sense of collective experience,” Ivan Krastev, chairman of the Centre for Liberal Strategies in Sofia, said by telephone from Vienna. “The Soviet Union was formed after World War I and the EU after World War II. At least the Soviets had a common language.”

The vision that knitted together the states of the Soviet Union was Communism. When that founding principle was cast into doubt, partly through the advent of democracy in the former satellites of eastern Europe after the Berlin Wall fell in 1989, faith in the central Soviet government evaporated.

Greece’s departure from the euro bloc would deal a blow to the EU’s raison d’etre, as set out in the 1957 founding Treaty of Rome, to “lay the foundations of an ever closer union,” said Mark Mazower, director of the Center for International History at Columbia University in New York and author of “Dark Continent: Europe’s Twentieth Century.”

Blurred Vision

“The EU was driven by an ideological vision of the elite,” said Mazower, who also has written books about Greece’s economic crisis between the wars and the Nazi occupation of the country. “Once a certain ideological vision of the future is belied by events, you have a problem. Such a loss of confidence in its ideology was devastating for the Soviet Union.”

The collapse of the ruble zone followed what the historian Stephen Kotkin describes in his book, “Armageddon Averted,” as the almost inadvertent dismantling of the Soviet Union by President Mikhail Gorbachev and his rival Boris Yeltsin.

The Russian republic, led by Yeltsin, declared sovereignty from the Soviet Union in June 1990, the first of the Soviet states after the Baltics to do so. Ukraine, Belarus and Moldova followed. It was a step that led to the dissolution of a federation of 286 million inhabitants. The euro region has a population of 331 million people.

As Gorbachev struggled to formulate a new “Union Treaty,” it was by then too late. In 1991, Russia, Ukraine and Belarus declared a Commonwealth of Independent States that had no common parliament, president or citizenship.

Economic Ties

While the three countries now have separate currencies, they are still intertwined economically.

Russia remains Ukraine’s largest trading partner, accounting for 28 percent of all exports and 38 percent of imports in the first quarter, according to the state statistics committee in Kiev. In Estonia, the only former Soviet state to adopt the euro, Russian trade makes up 9 percent of the total.

Belarus, traditionally Russia’s staunchest ally in the post-Soviet era, is the only sovereign state outside Russia to sell bonds denominated in Russian rubles.

The lesson for the EU is that it should be watching closely what Germany is doing, and be wary of calls for a smaller euro zone, or a “two-speed Europe,” Krastev said. Unions don’t break up because of troubles in peripheral countries, they break up from the core, he said.

“Disintegration doesn’t occur because everyone wants to go their own way,” said Krastev at the think-tank in Bulgaria. “It happens because politicians envisage a closer, optimal union. This crisis is already reducing the borders of solidarity. The EU space is going to be renegotiated.”

‘Terrifying Paradox’

The alternative scenario of deeper political union in a bid to save the euro may be even more dangerous, the British historian Antony Beevor said in an interview in Stockholm, where he was promoting his new book, “The Second World War.”

“We are about to see a terrifying paradox,” Beevor said. “If the European Union goes for sudden unification to control the economies of the south which are doing so badly, then we are going to see almost an elective dictatorship from Brussels, with just the presidential elections being direct. That is going to produce the opposite of what they wanted -- i.e. it will reawaken the monster of nationalism.”

Golden Dawn, a Greek nationalist party with a red-and-black logo resembling a disentangled swastika, entered parliament for the first time in the May 6 election. Golden Dawn plans to build on its popularity in the June 17 vote. That specter also emerged in Finland where the anti-bailout True Finns party won 19 percent of the vote in last year’s national election.

System’s Weakness

“Nothing lasts forever,” said Eric Hobsbawm, president of Birkbeck College, London University, and a British historian whose works include “The Age of Revolution: Europe 1789-1848.” “The European project was to try and turn Europe into a sort of federal state. I didn’t ever believe that was going to work.

“The whole essence of Europe is that it hasn’t got a basis for unity,” said Hobsbawm, who is 94. “Greece is a special case which shows the potential weakness of the system.”

As the Soviet states reverted to old national borders, fiscal union disintegrated. Though the Russian central bank was the only one of the 15 national banks with a license to print rubles, all of them could issue credit.

Runaway deficits and hyperinflation followed. Ukraine had an average quarterly inflation rate of about 100 percent from the second quarter of 1992 through the third quarter of 1993, according to Patrick Conway, a professor of economics at the University of North Carolina, in his essay “Currency Proliferation: the Monetary Legacy of the Soviet Union.”

Russian Blow

In the end, it was Russia that dealt the death blow to the ruble zone by setting ever-tighter restrictions and introducing a currency reform in 1993 that took fellow members by surprise.

Conway’s essay dates from 1995, a time when European leaders were negotiating terms for the introduction of the euro. He wrote then that the “ruble area’s demise is significant for Western Europe. Monetary union requires fiscal coordination and fiscal constraint.”

German Chancellor Angela Merkel has repeated that the euro is the glue that holds Europe together. “If the euro fails, then Europe fails,” she said during a speech in November.

The trouble is, as the ruble experience shows, that a joint currency requires its own glue that goes beyond common economic interests, Krastev said.

“A currency is about trust,” he said. “There is a need for an emotional sense of shared citizenship to have a common currency. It is good to have a shared sense of belonging.”

To contact the reporter on this story: Catherine Hickley in Berlin at chickley@bloomberg.net.

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net

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