More than a year after the eurozone first announced support for Greece, the country’s trauma and the eventual fate of the euro itself remains unresolved.
When the euro was launched, I remember relatively objective commentators arguing that, to be successful, the economic side of economic and monetary union needed a much stronger political framework within which to manage the eurozone’s fiscal policies. They have been proved right.
This is not the moment, however, nor is there good reason to abandon seven decades of building union in Europe. It undoubtedly remains a huge challenge to complete the project. We are attempting to reconfigure the largest economic space in the world since the United States of America was created. But in a world that is fast tilting away from its postwar Atlantic centre of gravity, Europe needs more than ever to come together and maximise its competitive strength and market power.
While it has not been easy to discern the strategy of Europe’s high command in putting out the fire on its periphery, a three-stage response is emerging: first, to stop the immediate haemorrhaging by means of further transfusions of liquidity to the eurozone’s insolvent members; second, accept, finally, that the fundamental problem, certainly in the case of Greece, is one of solvency not liquidity and prepare for an orderly reconstruction of their sovereign debt that is viewed as inevitable by private debt holders and preferable to a disorderly default which would halve Greek living standards overnight and remove any early prospect of economic reform and growth in the country; and, third, once the immediate crisis has passed, build on the tighter fiscal rules, early warning of macro imbalances, greater financial regulation and analysis of systemic risk of the past year and introduce more far-reaching fiscal interventions and controls across the whole area that, in effect, will amount to a significant step towards fiscal and political union.
None of this is going to be easy or straightforward to manage for the simple reason that Europe is facing not one but four interrelated crises.
There is the immediate crisis of insolvency among the eurozone’s weaker members but this is complicated by a continuing banking crisis. Many European banks are still carrying real or potential significant losses and are heavily exposed to the sovereign debt of the eurozone’s insolvent members. We are familiar with Germany’s deep hostility to the costs of bailing out these states falling on the taxpayer alone. But the fact that is rarely mentioned in this debate is that it is a choice between bailing out these states, or bailing out the German, as well as other, banks that are their creditors.
These two interwoven elements – insolvency and vulnerable banks – have brought to a head the structural competitiveness crisis built into the eurozone from the start – the head start that the early member northern states had in productivity over the so-called periphery states such as Greece, Portugal and Spain. Before the crisis this could be papered over with a Europe-wide “structural reform” agenda – honoured more in name than action – that aimed to encourage convergence in productivity and competitiveness through tough industrial and other changes in product and labour markets. There was also a hope that a continuing rising tide of economic growth in Europe would “lift all boats”.
In practice much of the “lifting” of the economies of Greece, Spain, Portugal and Ireland over the past decade was driven by what was demonstrably an unsustainable credit-driven boom. A boom that lessened the pressure on these economies to address underlying structural issues, while lack of adequate financial regulation facilitated the recycling of financial surpluses in the form of imprudent lending in Ireland and the southern member states. The end of the boom left them severely weakened and exposed, with no freedom over their interest rates and currency to make any correction.
Challenging as all these problems might be, they would be soluble through strong political management and policy decisions, but for Europe’s fourth crisis: that developing over the European Union’s political legitimacy. And here is the rub. The major step towards economic and fiscal union – what the European Central Bank president Jean-Claude Trichet has called a “quantum leap” in euro area economic governance – however desirable in principle, would take the EU into new and highly problematic political territory. It would mean, in effect, giving European authorities the right to veto member state fiscal and competitiveness plans that fail to match up to what is need to deliver “adjustment”. Looking even further ahead, Mr Trichet envisages a ministry of finance for the EU.
Whatever the merits of such an approach – and logically the ECB president is right – I don’t see such moves easily winning public support. In national elections or further referendums, Europe’s current “integration fatigue” would almost certainly prevail. The German electorate, notably, would be hard to persuade. It could certainly be argued that Germany’s whole economic success depends on an integrated European economy that is the base for their global competitiveness and political stability, and the recreation of a soaring D-Mark would be disastrous for its export sector. But having experienced a decade of squeezed living standards and labour market reforms, following their belt-tightening to bring reunification about, Germans will not be keen on being tethered even closer to Europe’s underperforming periphery, in particular Greece where real wages have gone up 40 per cent in the past decade and yet tax evasion and corrupt and restrictive practices are rife. And the German public will not be alone.
So what is going to happen? The EU’s response, stretched over the next couple of years, is inevitably going to be a messy compromise between the urgent need for collective action and the huge political difficulty of taking the further explicit steps needed to fiscal union.
In my view, the basic logic and European belief in union will prevail. But it is going to be a rocky and hard fought road and advocates of greater union will need to be more honest with the public, and more sure of their arguments, than they have been in the past. It is possible that Europe’s political nerve will fail. But I would not put money on it. Few share the British prime minister’s apparent view that others can make as big a mess of it as they wish as long as the UK does not have to pay anything more – a shortsighted position that fails to recognise Britain’s wider economic interests.
There is a strong resolve in Brussels to do whatever it takes and get through all the current crises because economic failure would hurt a huge amount more than Europe’s amour propre. Politics has a way of conforming to political necessity.
The writer is a former UK business secretary and EU trade commissioner
Europe’s fiscal and political union train has long since left the station
The book of Ecclesiastes teaches that there is a time and a season for everything. The time for Peter Mandelson’s admirable call for Europe to come together towards greater political and fiscal union was before the euro’s January 1999 launch. For at that time the political spirit for greater European integration ran high and the extraordinarily large economic imbalances that presently characterise the European periphery were yet to manifest themselves.
Making the same proposal for greater political and fiscal union today in the midst of a major sovereign debt crisis seems distinctly odd. Europe’s political elite is experiencing the greatest of difficulties in carrying its electorate along in stitching together yet another bail-out package for Greece. Yet Lord Mandelson seems to think that these electorates can be convinced that it is in their own interest to sign on to a fiscal union that will involve permanent transfers of taxpayers’ money to the periphery.
One has to admire Lord Mandelson’s unbridled optimism in the face of mounting evidence to the contrary that politics has a way of conforming to political necessity and that the basic logic and belief in European union will prevail. However, one has to wonder whether this view does not overlook the major public finance and external imbalances in the periphery that are now tearing the eurozone asunder. It is difficult to see how political wishful thinking will redress these imbalances while keeping the peripheral countries within the euro.
Rather than engaging in wishful thinking about the relative merits of greater fiscal and political union, Europe’s leaders should now be seriously thinking about plan B. How is an orderly debt restructuring and exit from the euro to be arranged for Greece, Portugal and Ireland? How are Spain and Italy to be ringfenced? How is a major European banking crisis to be avoided when countries in the periphery exit the euro?
The writer is a resident fellow at the American Enterprise Institute