The end of the eurozone crisis could now be in sight. One day, the euro verges on collapse. The next, a comprehensive solution is within reach. With sky-high Italian, Spanish and even French bond yields, we want a final answer: is the eurozone to be or not to be?
But what if it doesn’t sink or swim – what if it just bobs? Leaders of the 17 member states, the European Commission and Council will convene on Friday for what is set to be a climatic meeting. They will reaffirm their common goal: a united eurozone with prospects for sustainable growth. They are also likely to signal, more so than at any previous moment in this crisis, agreement on a systemic solution: a more robust economic framework to govern the euro. Near-term crisis management will be backstopped by the European Central Bank.
But over time these bright signals will dim as the leaders’ battle over priority, sequence and scope. We’ll get a grand bargain in theory, but a reality that does little more than muddle through. The eurozone will not fragment in the next year – and it is unlikely that it ever will. But that does not mean the problems have been solved. Instead, expect continued uncertainty, volatility and macro headwinds as we wait for the yes or no answer that isn’t coming. Welcome to the most turbulent status quo in economic history.
Just days ago, many were predicting a collaps of the eurozone. But last Monday, Mario Draghi, president of the ECB, delivered a game-changer. If there is agreement on a “fiscal compact” between member states that leads to a more unified eurozone macroeconomic policy framework, then “other elements might follow”. So on Friday eurozone leaders will do enough to allow the ECB to step in and manage near-term volatility, while also making a tentative road map toward fiscal centralisation. Importantly, progress can come without treaty reform, at least in the near future. This means proposals small enough to avoid a messy ratification process in European Union’s 27 legislatures could, in fact, prove big enough to justify ECB support. Down the road, the fiscal compact will progress through a reworking of the EU’s charter. There is light at the end of the tunnel.
Often when things look bad, they’re not as bad as they seem. But when things look good, they’re not nearly that rosy. This is the essence of ‘muddling through’. An overwhelmingly resilient force, ‘muddling through’ blunts systemic solutions, but also cushions against grand failures.
Yet by the same token, ‘muddling through’ blunts comprehensive reform. As lofty as Friday’s proposals toward fiscal union may be, their adoption will prove acrimonious and protracted. Each member state will grapple to minimise the infringement on its sovereignty. Germany and France will aim to set the rules for weaker states that will push back against asymmetric adjustment. European institutions will look to reinforce their own role in the new framework. It will be a case of incremental reform that won’t end debate, but rather engender more of it.
Although this may be ugly, it does constitute progress. Look at how far we have already come with the creation of the European Financial Stability Facility, the European Stability Mechanism and now, potential treaty change. And while this is no way to win a race, the eurozone will reach the finish line. Merkel’s “marathon” analogy speaks to this.
Just as ‘muddling through’ kills the best and worst of outcomes, expect the German approach to do the same. After all, it already has done. In the late 1990s, Germany, with Europe’s strongest economy and institutions, had the most to lose with the euro’s creation. As a result, it disproportionately influenced the bloc’s design. The Delors report, which set up the EMU blueprint, mirrored German preferences for a more decentralised system of economic policy – one of the reasons for the current mess. Fast forward a decade: Germany is once again ascendant and will once again have outsized influence on the design of the rules going forward. This will prevent the optimal solution being implemented. The burden of adjustment will fall on deficit countries, while the beneficial role the EC could play as guardian of the treaties will be limited. Check back in a decade for a full damage report.
The eurozone has come a long way, even if its leaders fail at every stage to get ahead of its problems. Look for good news on Friday: a systemic solution will be outlined, but its realisation will be more ‘muddle through’. It won’t be pretty, but neither will the eurozone experiment fail. Call us optimists, for lack of a better word.
This article was co-written with Mujtaba Rahman, a Europe analyst at Eurasia Group. Ian Bremmer is president of Eurasia Group and author of ‘The End of the Free Market’