A giant mental disconnect has opened up between the core of Europe and its periphery. A mundane existence in one part now coexists alongside a situation of disaster in the other, meaning that a sense of urgency is not shared across the Union when it comes to the euro crisis.
According to one vision of the crisis, the market is self-regulating and thus, after a period of painful adjustment, the countries of the periphery will regain competitiveness and return to growth. The sacrifices of today are the necessary precondition for the prosperity of tomorrow. Therefore, we should be patient because it will all work out in the end.
The official narrative of European social democracy is a variant on this theme. The economic downturn will swing the pendulum back in favour of the centre-left. According to this account, the victory of Francois Hollande and the PS marked the beginning of a left-wing comeback in Europe, which was supposed to have been followed up by a thumping victory for Bersani and the PD in Italy. This fall, the German SPD would surge to victory. The icing on the cake would be a socialist win in the 2014 European elections, ushering in a progressive Commission and bringing an end to the Europe of austerity. On the periphery, we should keep the faith because it will all work out in the end.
There are two obvious flaws with this analysis: the string of victories is not guaranteed (see Italy) and nor is a dramatic change in policy on account of new leadership guaranteed. In fact, as the crisis unfolds, the forces necessary to make the progressive majority a reality in the short term are getting weaker, not stronger. The coalition necessary to build a social Europe is unravelling, and the social democratic parties of Europe have almost universally lost their ability to articulate this progressive majority in their home countries.
On account of the architecture of the euro zone, the countries of the European periphery cannot engage in a fiscal stimulus, a monetary stimulus, a competitive devaluation, or a financial restructuring. Trapped in the midst of recessionary downward spirals, their policy space is extremely limited. The euro zone framework has generated an economic depression and a crisis of democratic legitimacy. These are fertile conditions for even greater political failures, not for success.
Take the Spanish case: A stimulus originating in the public sector is both prohibited, on account of existing deficit targets, and impossible, on account of financing costs on the private markets. Lending channels in the private sector are blocked, as the financial sector’s balance sheet is still overwhelmed by the ever-increasing bad debts originating from the bursting of the real estate bubble. The obvious move would be to engage in a massive financial restructuring (i.e. let the bad banks fail).
This is not possible because the ECB will not act as a lender of last resort. Banks in the periphery cannot fail without wiping out small savers. In order to guarantee deposit insurance, a bailout of the private sector (and Memorandum of Understanding) was therefore required. Last June the leaders of Europed stated: “We affirm that it is imperative to break the vicious circle between banks and sovereigns.” Events have shown this to have been an empty promise. The cost of the bailing out the banks is now being passed onto the public purse, and the drowning banks are pulling down the sovereigns with them. But if this were not bad enough, the Cyprus deal shows that not even deposit insurance for small savers can be taken for granted.
Amidst the multiple perversities of the euro crisis, this latest development is the most shocking. Not even a willingness to take on all the bad debt of the financial sector is a guarantee that savings will be guaranteed. The main practical argument against a euro exit is a corralito; after Cyprus, the risk of the periphery being “damned if you do, damned if you don’t” has surfaced. New horizons of misery have opened up.
The turn of events in Cyprus makes it far more difficult to defend the proposition that change in Europe is just around the corner, and that it will be for the better. The case for optimism does not rest on solid empirical foundations; there is little evidence of strong majorities in Germany favouring the reforms that would be needed to end the crisis and balance the euro zone. Perhaps the mounting chaos (the expected Polanyian counter-movement) on the periphery will provoke a change through contagion, but an embrace of chaos is not a political strategy. If Plan A on the periphery boils down to placing our hopes in the SPD winning big and then carrying out big changes, a Plan B is clearly needed.
If the countries of the periphery were on a gold standard, they would have already been forced out of it. The euro-induced depression is a breeding ground for populism, anti-politics, extremism and bad-blood in general; it is a toxic environment for dreams of an ever closer Union.
The course of events demands a lifting of the taboo surrounding the dissolution of the euro zone. And it is worth pointing out that dissolution would be easier if initiated by the strong partner (Germany), rather than by the periphery. If solidarity cannot be achieved through a progressive reform of Europe’s economic institutions, then perhaps it is time to consider taking them apart. Perhaps the only way to save the Union is to ditch the euro. At minimum, it is a debate worth having.
 Unless you are the villain in a Batman movie