Sunday, 13 November 2011

The end of the European Dream

To say that the European Union is in a crisis would be an understatement. The EU has went through numerous crises in the past and its doom has been predicted over and over again without ever materialising. The answer to difficult problems has always come after lengthy discussions and it has always been more integration. But this time is different. For EU standards, the current developments are answered at an impressing speed. After so many rounds of negotiations, political socialisation has taken its told at all the levels, EU leaders honestly starting to see each other as colleagues and being more inclined to accept deeper integration. Crisis hit countries are willing to cease even more sovereignty in return for help, not just in the Eurozone but in other member states as well. All these developments have happened in less than two years and are bound to be followed by more. But nobody is impressed. While solutions might have come at a record speed they have still not come fast enough. Coordination/Integration might have gone to levels unimaginable just 5 years ago but it needs to go much much further than this if there is to have any chance of reigniting the idea of transforming the EU into a superpower. But that will not happen and the rest of the world knows it. The public is not ready to put the EU before the country and it will not change being Greek or Finish in order to be European. Failing to convince the rest of the world that solidarity is indeed a basic value of the EU, the Union has lost any claim of leadership in world affairs. The EU's power is given not by an equation of adding up member countries capabilities but also by multiplying this sum by a factor representing the willingness of these states to work together. And at the present, that factor is close to zero.   

How did we get here?

It is hard to put the blame for this situation on one factor alone. The origins of this are complicated and go long back in time. The Euro was created with a fundamental flaw and everybody knew this was the case. A monetary union cannot survive for long without a fiscal union and strong political coordination (preferably a full fledged political union). But, at the introduction of the currency the hope was that these will come at a later stage, once the public understands the benefits of a common currency and is willing to give up even more sovereignty so it can enjoy these benefits. In the meantime, it was up to the politicians to ensure stability. But power corrupts and it was impossible for many politicians not to take advantage of the opportunity to borrow at low cost and give the public more than it deserved so they could be voted in power again and again. When leaders become entertainers any plan for progress is rapidly put aside.

Without progress and growth, there are no benefits for a common currency. How would Italy export more in the eurozone when it actually produces less than it used to do when it was using the lira? Differences between the North and the South were not supposed to happen. Politicians were expected to coordinate their policies until a fiscal union would become possible but a top-down change cannot happen if the top does not actually start to change.

But whatever happened before the first wave of the economic crisis could have been easily solved. A European plan of reforms would have helped the EU come out of the crisis stronger, not weaker. The crisis was, in a way, a golden opportunity for the EU to impose itself as a world leader but it became a missed opportunity (by a very long shot). It was an opportunity that transformed itself into a curse as the response to the problems was uncoordinated, chaotic, without any clear vision for the future and it ended up sinking the EU's prestige.

The lack of a coherent European response can be blamed on Germany. Chancellor Merkel's refusal to guarantee bank stability at an EU level opened the way for the market to attack weaker states. She failed to see how connected the financial system was and when this became obvious she preferred to play down the risk of contagion. When the mistake became clear, it was already too late. The moves needed to fix the situation were so politically toxic that none of the politicians even dared to mention them. Eurobonds and full fiscal union were dismissed as soon as they proposed and every compromise reached was so insignificant that it actually scared investors even more and aggravated the crisis.  Contradicting statements only made matters worse. There was nobody in charge and the 'giant with many heads' seemed to be committing suicide by banging its own heads together. As a pro-European I have to say that the whole performance was grotesque and shameful. It became clear that there was no coherent vision about what to do, there was no complete and realistic programme put forward and, as the rest of the world was looking at the developments with horror, the EU leaders continued to fight each other.

Confidence betrayed in the Euro family
But it would be a mistake to point the finger at politicians only. The public is equally at fault because the politicians only did what the public opinion was demanding from them. Nationalistic views became the norm and no pro-European view was pushed forward. As the crisis started to be felt, people expected to have priority in receiving help from their own government not realising that in order for their situation to get better, they would have to accept helping others. The spiral went down and World War II was mentioned a couple of times as claims of forgotten unpaid past loans became arguments and discussions shifted from how to save the Euro to who deserved to be it the Euro (forgetting that one of the founding creeds was that we would all eventually use the Euro).

While all these were happening, the European Dream had died. The Union started looking less like a happy, rich and educated family and more like a fight-ridden, vicious familly on the brink of a divorce. The EU lost its credibility both outside and inside of its borders. Philosophical promises of peace and wealth are now so emptied of their meaning that they tend to be contra productive when they are used.

Where do we go from here?

There are no easy solutions to end this crisis. Realistically speaking, we have gone past the point where the worst outcome would be to have a small country defaulting and leaving the EU. The chances for a full disintegration followed by social instability and economic depression are no longer zero. As France prepares to have its rating downgraded, the EU is running out of time to prevent the crisis from becoming its end.

As I see it, there are only two ways in which this could end. The positive (if you could claim that any outcome might still be positive) solution would be reached only if the Nordic countries accept some sort of sharing the debt as the Southern states push further with reform. It is not enough for the Northern block to share the burden or for the Southerners to implement strict austerity, both have to happen if there is to be a long term solution that could lead to further crises being avoided. For this to happen we need strong politicians that can convince the public of the necessity of these changes. A clear vision for how the EU will look like in the future and how it plans to get there needs to be put forward. Crucially, this must be a vision that all its members adhere to, those who do not accept it should be free to leave the Union (and yes, this is a direct reference to the UK). I don't see anything wrong in German fiscal discipline becoming the norm across the continent, it is a price that all of us should be willing to pay if we actually want a future that could deliver growth. If that means that we have to make sacrifices today, then so be it. These sacrifices should, however, be fair. The is no point in punishing the Greeks or any other people and make them go through humiliating poverty, graduate steps and moderate changes will be more easily accepted. The money to solve all the problems are already there, the investors have them, the EU only needs to convince them that it is credible as an investing opportunity.

Or, we can just give up on the EU and try to save what we can on a national basis. Stopping the free flow of labour and money (because if the Euro goes, so will the EU; the social impact of breaking up the eurozone would be too great to handle within a free border area, what would stop the Greeks from just leaving the country and move to Germany?) would have dire consequences on the continent. The problems would be so complex that there will be no one ready to take a risk and invest in a new business, the economy will sink as tariffs and regulations would take the place of the free market. But worse, socially, the public will blame all its problems on the EU and on other EU members. There will be a dangerous level of resentment and we will face the same dangers that we faced in the 1930s. And we all know how well that worked out. This scenario might seem too extreme but I am afraid that it is not as improbable as it sounds. Even the slightest chance of this happening needs to be treated seriously and actions to avoid such a situation need to be taken as soon as possible.


  1. One thing i disagree with:

    Merkel can and should be blamed, because she missed the opportunity to solve the problem, when it was still developing. In fact, the ECB should be held responsible too, because an organised Greek default would have been feasible as early as 2009. However, let`s not forget, Merkel is held directly accountable by the German Bundestag for her acctions. Thus, the opinion of the german people; who had enough of bailing the southern countries out with more than 200bn euros of their tax-money; matters a lot to Mrs. Merkel, and she cannot ignore it, especially when her CD party is unpopular.

    About the nordic countries, who put up the EFSF funds, remember that Slovakia was one of those countries. Now this is interesting, because slovakian standards of living comes nowhere near to Italy`s,or even Greece`s, therefore you basically want a poorer nation to rescue a richer one, just because otherwise the system collapses. No wonder that the motion of a second 5bn bailout was defeted in the Slovakian parliment. If I was slovakian, I would not be happy either, if my tax money goes to Greece.

    With the austerity measures being harsh, I agree. But otherwise, the problem will not be fixed. Selling national assets now, seems like a fire-sale, and Greece will not be able to raise enough money, unless it cuts down on pretty much every government expenditure. Painful as it may be.

  2. Yes, you described very well what situation Merkel was in. But she could have explained to the German public that they have a surplus because of the euro and because the southern countries imported goods from Germany. Or she could have explained what the situation could become if swift measures were not taken (she would have basically described the situation we are in at the moment.

    As for Slovakia, they might soon get their own bailout, their yelds went over 7% last week even as the figures came up showing their exports grew by about 10%. Why? Because they are completely dependent on the other eurozone members buying their goods. So if the others stop buying, they go down too. They might be poor, but if they don't contribute to saving the others, they will be even poorer.

  3. True, Merkel should have told the german public, what`s going on, but now it`s too late. I see the problem, with France being weak, because Germany needs a partner, it cannot take on the whole EU. And they do not want to either.

    I red that the solituon lies in beefing up the EFSF to over 1 trillion, with Chinese money and other investors. I hope this won`t happen, as China won`t lend without conditions, and imposing restrictions on Chinese companies and trade after that will be next to impossible.

    Ireland`s long term yields are over 8% again, so even they could be recipients of extra money.