From the start of the Greek debt crisis in 2010, the major European players should have understood the risks and consequences that it posed for the European Union. They certainly don’t give that impression to onlookers.
The crisis was always about much more than Greece: a disorderly insolvency there would threaten to pull other economies on the EU’s southern periphery, including some very big ones, into the fiscal abyss, along with major European banks and insurers. That could plunge the global economy into another financial crisis, delivering a shock equivalent to the autumn of 2008. It would also mean a eurozone failure that would not leave the Common Market unharmed.
For the first time in its history, the very continuance of the European project is at stake. And yet the behavior of the EU and its most important member states has been irresolute and dithering, owing to national egotism and a breathtaking absence of leadership.
States can go bust just like companies, but, unlike companies, they don’t disappear when that happens. That is why states should not be punished, and why their ongoing interests should not be underestimated. Insolvent states need help with restructuring, both in the financial sector and well beyond it, so that they can work their way out of crisis.
This is certainly true of Greece, whose structural problems are much more sweeping than even its financial difficulties. Thus far, the EU and the Greek government have failed to address Greece’s structural problems. But they need to develop (and fund) an appropriate strategy for economic reconstruction, in order to make clear to the Greeks – and to skittish financial markets – that there is light at the end of the tunnel.
Everyone knows that Greece will be unable to work its way out of crisis without massive debt relief. The only question is whether the country’s debt restructuring will be orderly and controlled or chaotic and contagious.
Either way, Germany’s internal debate about whether to pay for the Greek debt is risible. Refusing to pay is not a viable option, because Germany and all other eurozone members are in the same boat. A Greek default would threaten to sink them, too, for it would raise immediate concerns about the solvency of Europe’s systemically important banks and insurance companies.
So what are the eurozone’s heads of government waiting for? Are they reluctant to come clean with their people out of fear for their own political futures?
The European financial crisis is really a political crisis, because EU leaders are unable to decide on the necessary measures. Instead, time is lost on secondary issues largely rooted in domestic policy concerns.
It is certainly right, in principle, to argue that the banks should participate in financing the resolution of the debt crisis. But it makes little sense to insist on it as long as losses by banks that remain “too big to fail” could trigger a renewed financial crisis. Any chance to make this work would have required overhauling the financial system early in 2009, but that opportunity was largely wasted.
As long as the EU’s life-threatening political crisis continues, its financial crisis will continue to destabilize it. At the heart of resolving the crisis lies the certainty that the euro – and with it the EU as a whole – will not survive without greater European political unification.
If Europeans want to keep the euro, we must forge ahead with political union now; otherwise, like it or not, the euro and European integration will be undone. Europe would then lose nearly everything it has gained over a half-century from transcending nationalism. In the light of the emerging new world order, this would be a tragedy for Europeans.
Unfortunately, when the outgoing president of the European Central Bank, Jean-Claude Trichet, proposed a step in this direction by suggesting that a “European Secretary of the Treasury” be created, heads of state and government dismissed the idea out of hand. Hardly anyone on the European Council seems willing even to acknowledge the depth of the EU crisis.
Resolving this crisis requires more Europe and more integration, not less. And yes: the rich economies – first and foremost Germany – will have to pay for the way out.
Germany and France, the two crucial players in this crisis, will have to devise a joint strategy, because only they, working together, can push through a solution. The problem is that the French referendum on the EU constitution in 2005 vetoed further political integration, while further economic integration may now fail because of Germany.
What is required, therefore, is an open bilateral French-German dialogue about a comprehensive realignment of the monetary union. Treaty changes are impossible; therefore, different methods will need to be found, which makes the Franco-German partnership all the more important.
Regardless of the EU’s political crisis and paralysis, Europeans should not forget how important its existence is and will continue to be. One has only to look back to the first half of the twentieth century to understand why.
Copyright Project Syndicate