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Eurocrisis persists due to timid politics

With the European crisis continuing to rumble on, what will it take to break away from the past and take concrete steps towards a banking, fiscal, economic and political union?

At the March session of the Brussels Forum, British historian Timothy Garton Ash said: “The EU today is an experimental laboratory of the future of the world.” Unfortunately, this laboratory is brewing a lethal concoction of isolationism, protectionism, apathy, populism and disillusionment.

Europe appears a prisoner of the past. Often the main argument in defence of further integration and the survival of the euro is that both have brought peace to the EU after two world wars. There are few convincing stories that place the EU in a global context and/or make a case for a starring role for the EU in world politics/economics. The result, as the Dutch professor Paul Scheffer contends, is “piecemeal erosion instead of piecemeal integration”. Will Europe be able to turn this narrative around?

Continuing European frictions

Owing to the twin political and economic crises, differences within Europe have widened; yet in some ways, trends are converging. This is not a positive development with regards to the latter: northern euro countries are no longer immune to the crisis. Even growth in Germany has been minimal.

It is imperative that the EU becomes stronger and takes concrete steps towards a banking, fiscal, economic and political union. However, in reality, most member states are moving in the opposite direction. They want to limit the powers of Brussels and gain more autonomy. Significantly, in recent years the decision-making process regarding the crisis has shifted from the European Commission, the supranational body governing the EU, to the European Council, consisting of the national leaders.

Friction also exists between the need for rapid intervention (as the crisis can, potentially, spiral out of control at any moment) and numerous rules, laws and procedures that are in the way of decisive action. The cases sitting before the German Constitutional Court are a prime example. Equally controversial is that the interests of global capitalism/the international financial markets and national politics are diverging. In a crisis, markets demand a different approach than the electorate and national (opposition) parties. Politicians are often caught between a rock and a hard place if they want to placate both markets and voters. For now, they are going down a road that makes many voters profoundly unhappy.

All these tensions lead to four schisms between:

  1. Euro countries and the other EU states. Several non-euro countries within the EU have indicated they do not like the fact that small groups of Eurozone members are taking decisions that impact on the rest. One fear is that the sphere of interest of these ‘cliques’ will gradually extend to other areas.

  2. Debtor and creditor countries. Until now, this has largely been a North-South divide.

  3. Countries that are happy to take the lead in ‘two-speed Europe’ and states that fear being left behind and marginalised.

  4. Germany and other countries – the abyss between Berlin and the rest of Europe is increasing. Surveys indicate that the Germans are seen as the most arrogant and least compassionate Europeans (albeit extremely reliable).

Presently, Germany is – partly against its will – the undisputed European leader. Yet it is clear that France, in particular, is becoming very nervous about the growing power chasm between Germany and its fellow Europeans.

Will Europe be torn apart?

Indisputably, the Eurozone has calmed down since the summer of 2012. This could well change before the year is out. Crumbling confidence in the EU will make it very difficult to justify a transfer of power to Brussels. Meanwhile, Brussels can only inspire confidence if it persists with the European integration project.

Chart 1: Germany: not immune to the euro crisis
Chart 1: Germany: not immune to the euro crisis

Source: Thomson Reuters Datastream/ECR

Plummeting faith in the national politicians and democracies is eroding Europe from the inside and thwarts a successful tackling of the crisis. Signs of this are political instability in Italy, Greece and other European countries, not to mention the corruption and abuse of power scandals, anti-democratic tendencies and government crises in Romania, Hungary, Bulgaria, Slovenia, etc.

Another development that threatens to tear Europe apart is the anti-European course of the UK. The British were never big fans of the EU but their antipathy seems to be in the process of becoming endemic. On top of this, a misguided strategy in the domestic EU debate has weakened the Prime Minister. Unless he is very careful, David Cameron could go the way of his predecessors, Margaret Thatcher and John Major, who were tripped up by inter-party quarrels about Europe. Of course it won’t do Europe any good if Britain becomes rudderless.

Finally, Germany’s increasingly isolated position is ominous. A virtually unbridgeable gap seems to have opened between Paris and Berlin. Not so long ago, little could happen without the approval (and material support) of the solid Paris-Berlin axis. Recently, France has mooted a number of proposals that were meant to tie Germany to a full-fledged union. However, Germany is clearly not sold at all on further integration, which will take a long time and will probably require a lot of political capital.

To be or not to be?

Evidently, the EU and the Eurozone need to make fundamental choices. Either Europe should slow down the process of integration and adjust its procedures accordingly, or it should get squarely behind the EU and the Eurozone. This would imply a full-blown banking union, with a communal deposit guarantee system as well as a shared resolution mechanism, as a stepping stone towards the political and economic union of Jean Monnet’s dreams. However, it is not likely that the latter will happen in the immediate future.

Europe has been sucked into a whirlwind of emotions, tendencies, and developments: fear, uncertainty, fury, introversion, doubt, populism and isolationism. As the experts point out, the ‘old continent’ is still milking its past glory. In addition, the European elite gives the impression that it is (totally) oblivious to how outsiders view the EU. A tentative conclusion is that as long as Europe lacks a critical sense of self-reflection and turns a blind eye to its failures, it cannot recover from its malaise.

Chart 2: Yield spreads could rise again
Chart 2: Yield spreads could rise again

Source: Thomson Reuters Datastream/ECR

The move to “great politics”

Will Europe take decisive action in the remainder of 2013? Unlikely. It will probably continue to stumble on, even if events show that this strategy is unsustainable. Shock therapy would be a better solution.

During a symposium about Europe, a professor from China cited a Chinese proverb: “It takes a year to grow rice, ten years to grow a tree and a century to cultivate people.” In short, the EU’s culture should undergo drastic changes but it will take a long time until the European minds (and hearts) are ready for this.

Eventually, there could be some positive surprises. Unfortunately, the trigger that forces Europe to act may well be an erupting crisis. In any case, Eurozone tensions are expected to increase this year because the EU and the EMU will likely remain stuck in a mire. Subsequently, the euro will depreciate against the dollar, as bond yields rise in the periphery and fall in Germany.

Should the Eurozone fail to put a lid on the tensions, in the longer term the markets will realise that the Germans will have to stand guarantor for the financial problems in the rest of the Eurozone. By then, German government bond yields could rise.

One thing is for sure, the European continent will keep struggling with a political, economic and social crisis as long as countries, and the EU as a whole, have to make do with – in the words of German sociologist Ulrich Beck – “pusillanimous” (faint-hearted) politics instead of “great politics”.