Issue 6 - December 2011
Restoring The Union - continued
A default by any one of these countries would deepen the financial crisis among banks in France, Germany and elsewhere that hold those countries’ debt. Economic and political tensions are high. Certainly Greek politicians of all parties are responsible for the country’s crisis. But the European Commission and the other member states are not blameless. They did not effectively scrutinize Greece’s economic data. They watered down the Stability and Growth Pact, the eurozone’s rulebook, when it became clear that France and Germany might fail the budget deficit test. And the technical assistance the EC provided Greece was inadequate given the scale of structural reform it needed.
Can the eurozone hold together? I believe its long-term viability will require stronger economic and fiscal governance, including:
- Limits — backed by the risk of sanctions — on member states’ ability to run up budget deficits
- Greater consistency between the economic and social policies that underpin productivity and competitiveness in each country — including traditionally sovereign decisions such as retirement ages, pension financing and healthcare systems
- Much larger fiscal transfers between “rich” and “poor” members of the eurozone, either through making direct transfers (such as the current Structural Funds but on a larger scale) or by allowing members to issue debt backed by the eurozone collectively
- Radical reform of the governance structure in Europe to cope with the emergence of a lender of last resort: the ECB, with enhanced powers and the European Financial Stability Facility, currently at €440 billion, but the intention is to expand it to €1 trillion
- Closer monitoring of individual governments’ fiscal policies and greater involvement of the European Commission
These are controversial ideas that, if implemented, would profoundly strengthen political integration while affecting national sovereignty. Many policies that currently are the choice of member states and their electorates in effect would become collective choices determined in some way by eurozone members. But already, alongside the negotiation of bailout packages for troubled member states and an ongoing debate about the size of the facility available for such rescues, we see the emergence of stronger economic governance mechanisms within the eurozone.
Such a system of governance will not emerge overnight. The politics are extremely difficult. We see that in Germany’s strong negative reaction to the idea of euro bonds (debt issued by member states that is backed by the European Central Bank and thus by member states collectively). German voters do not wish to subsidize the more profligate peripheral states. The Germans might be persuaded to change their position if reforms included much stronger controls over the policies and actions of member states that receive aid, but those states, of course, might see that as an unacceptable intrusion into their internal business. We have seen in Greece that popular resistance to austerity can derail measures agreed upon by elected governments.
There also is the question of how stronger links within the eurozone might affect the relationship with those members of the European Union that remain outside the eurozone, including the United Kingdom, Sweden and Poland.
One should not doubt the determination of the eurozone’s political leaders — especially those in France and Germany — to keep the union together and make the single currency work. But at this stage, the eurozone’s future is uncertain. If it is to survive, it needs much greater economic and political convergence. It is questionable whether the voters of Europe are ready for that.