EUROPE HAS LONG PRIDED ITSELF on being a model for the rest of the world of how to reconcile old enemies after centuries of war, blend the power of capitalism with social justice and balance work with leisure. Little matter that Europeans did not generate as much wealth as overworked Americans; Europeans took more time off to enjoy life. And little matter that Europe could not project the same military force as the United States; Europe saw itself as a “normative power”, able to influence the world through its ability to set rules and standards. Some Europhiles even imagined that Europe would “run the 21st century”, as the title of one optimistic book put it.1
The collapse of subprime mortgages in the United States, and the credit crunch that followed, only confirmed such convictions. The single currency, the European Union’s most ambitious project, was seen as a shield against financial turbulence caused by runaway American “ultra-liberalism”, as the French liked to describe the faith in free markets. But when the financial storm blew in from across the Atlantic, the euro turned out to be a flimsy umbrella that flopped over in the wind and dragged away many of the weaker economies. It led to the worst economic and political crisis in Europe since the second world war.
Starting in May 2010, first Greece, then Ireland and Portugal were rescued and had to undergo painful internal devaluation, that is, by reducing wages and prices relative to others. The process proved so messy and bitter that, even with hundreds of billions of euros committed to bail-outs, the currency several times came close to breaking up, potentially taking down the single market and perhaps the whole EU with it. The EU’s hope of becoming a global power dissolved as Europe became the world’s basket case. More than once, the United States forcibly pressed its transatlantic allies and economic partners to do more to fix their flawed currency union.
At the time of writing, in March 2014, the euro zone has survived the financial crisis – an achievement in itself, but won at too high a price. The euro zone bottomed out of its double-dip recession in 2013. But despite signs of “Europhoria” in markets the danger is far from over.
Among Europhiles and Eurosceptics alike, there is a growing belief that the euro has undermined, and may yet destroy, the European Union. Instead of promoting economic integration, euro-zone economies have diverged. Rather than sealing post-war reconciliation, the euro is creating resentment between north and south. Far from settling the age-old German question, Germany has emerged as all-powerful. The decline of France has accelerated, and the ungovernability of Italy has been reaffirmed. Tensions between euro “ins” and “outs” have increased, particularly in the case of the UK, which now hovers ever closer to the exit.
The chronic democratic problem has become acute: the EU is intruding ever more deeply into national policymaking, particularly in the euro zone, without becoming any more accountable to citizens. Perversely, the clearest sign of a common political identity, the European “demos” that federalists hoped would emerge, is to be found in anti-European movements.
For now the riots and clouds of tear gas in Greece and the mass protests by Spain’s indignados may have faded away. But almost everywhere, apart from Germany, which has barely felt the crisis, indignant voters have thrown out incumbent governments and abandoned centrist parties in large numbers. Anti-EU and anti-euro parties are on the rise, of both left- and right-wing varieties, in both core and periphery countries, and in both euro ins and euro outs. The scariest are in Greece, which has both radical leftists and neo-Nazi extremists, and has witnessed murderous violence among their followers. But the most consequential may yet be the scrubbed-up, besuited populists in countries such as France, the Netherlands and the UK, which were hardly the worst hit by the debt crisis. They have already changed the terms of the European debate in these countries. Once the champion of EU enlargement, the UK is increasingly turning against the cherished right of free movement of workers, and against the EU itself.
As the countries of the euro-zone periphery seek to regain competitiveness, their most striking export has been young emigrants in search of jobs abroad. These are no longer the manual workers of yesteryear who filled the factories of Germany, the mines of Belgium and the building sites of the UK. Now it is the young graduates who are on the move. In Portugal, the post-colonial flow has reversed, as hopefuls head out to Brazil, Angola and Mozambique in search of a better life. In Ireland, some churches have set up webcams so that émigré parishioners can watch services back home. Many have moved to other parts of Europe, notably Germany.
The story of how the European project was born, how the euro nearly died, how it was saved and how the EU should confront the dangers ahead is the subject of this book. The appendices provide a timeline, a glossary and the history of the crisis as told through covers of The Economist. Chapter 1 recounts the darkest days, when the European Central Bank (ECB), the International Monetary Fund (IMF) and others made secret preparations for the departure of Greece from the euro, and the possible collapse of the currency zone. The consequences, all agreed, were incalculable.
Chapter 2 shows how the idea of European integration was born from the political necessities of the early 1950s, with Europe emerging from the ruins of the second world war and then having to confront the challenge of the cold war. The euro was launched as a result of the failure of repeated attempts to fix exchange rates between European economies, and the desire to anchor a unified Germany more firmly within Europe after the collapse of the Berlin Wall.
The system that was created through successive treaties was a complex hybrid with elements of federalism and intergovernmentalism, a pantomime horse that was part United States and part United Nations. Chapter 3 explains the functioning of the EU, and the flawed structure of the euro, to help make clear how Europeans managed, and mismanaged, the crisis.
Chapter 4 shows how the launch of the euro was at first met with scepticism by outsiders, then treated with hubris by insiders. Blinkered by the fiscal rules, European institutions were for the most part unaware of the real danger to the monetary union. It did not come only, or mainly, from the accumulation of deficits and debt, which became easier for many countries to finance as interest rates fell. Rather, the bigger menace came from underlying external imbalances, with current-account deficits allowed to balloon in the belief that these would always be financed within a currency union.
As the financial crisis turned into a debt crisis in early 2010, European leaders and institutions muddled through from summit to summit, devising responses that were always too little, too late, and raised the cost for all. There were two broad phases, coinciding roughly with the tenures of Jean-Claude Trichet and Mario Draghi as presidents of the ECB, as noted in Chapters 5 and 6.
First there was a period of banking crises, bail-outs, austerity and debt restructuring – focused most acutely in Greece. This increasingly fraught time culminated in angry confrontations at the G20 summit in Cannes in November 2011, where the prime ministers of Greece and Italy were summoned for a dressing-down by fellow leaders and subsequently pushed out of office. In the second phase there was a growing realisation of the need to come up with a more systemic response. Seeking to halt the “doom-loop”, in which weak banks and weak governments were dragging each other down, leaders embarked on the process of creating a banking union in June 2012. Soon thereafter, the ECB stepped in as a more credible lender of last resort for governments after Draghi declared the bank would do “whatever it takes” to stop the euro from breaking up.
The crisis has profoundly changed relations within the EU. It has confirmed Germany as the predominant power in Europe; it has shifted institutional power within Brussels from the European Commission to national governments; and it has caused a growing tension between euro ins and outs. This transformation is described in Chapters 7 and 8.
The crisis has also widened the democratic deficit in Europe, which the growing power of the European Parliament has been unable to fill, as explained in Chapter 9. Moreover, it has disrupted the core business of the EU that is often out of the headlines, from the single market to trade negotiations, as set out in Chapter 10, as well as the EU’s hope of exerting greater influence on world affairs, a sorry tale recounted in Chapter 11.
The concluding Chapter 12 assesses the damage done by comparing the performance of the euro zone since the beginning of the global financial crisis with that of the United States. It tries to draw lessons from the upheaval and offers recommendations for reform. The main risks to the euro zone, and to the wider European Union, are now predominantly economic and political. The recovery is still weak, making it harder to bring down unacceptably high unemployment and leaving the euro zone vulnerable to a triple-dip recession, if not outright deflation. In turn, economic stagnation will worsen the growing polarisation of European politics.
The actions of European leaders may have averted collapse in the short term, but they have not found a lasting solution. The ECB’s bond-buying policy stabilised debt markets but is untested, and Draghi’s great bluff may not hold forever. The development of “economic governance”, involving tougher fiscal rules and deeper intrusion by Brussels institutions into national economic policies, is unlikely to be accepted indefinitely. At some point, perhaps after the crisis has faded, national governments will want to reassert their autonomy. Discipline should be imposed by markets, not by Brussels. This means that governments should be allowed to go bust when they make a mess of their economic policies. In short, the no-bail-out rule needs to be restored. Doing so requires a euro zone stable enough to withstand the shock of a default. The answer, the conclusion argues, is a targeted dose of American-style fiscal federalism in which some of the risks are shared. This involves several reforms, from completing the embryonic banking union to issuing joint debt and perhaps setting up a modest central budget that can help stabilise economies. For the foreseeable future, the EU’s crisis of legitimacy can be addressed only by enhancing the role of national parliaments.
None of this will be easy, but all of it will be necessary if the project of European integration is not just to survive but to thrive with the consent of its citizens.
John Peet and Anton La Guardia
March 2014