EU Debt Crisis: Assessing the Damage

Back in January, everyone expected 2010 to be a watershed year for the European Union. It certainly has been that, but not for the reasons people expected at the time. The advent of the long-awaited post-Lisbon union, with its new offices of president of the European Council and foreign policy chief, turned out to be an anti-climactic non-event.

Instead, the lingering legacy of the pre-Lisbon union — cooked books and hidden debt, along with fundamental political and cultural differences on fiscal and monetary policy — has brought the EU to its knees, just when it was expected to soar. This week has offered a brief respite from near-daily announcements of the union’s impending demise, so I thought I’d take advantage of that to try to assess the damage.

The events of the past few months have confirmed many critics’ previous observations about the weakness of the euro as a common currency zone and the shortcomings of the EU as a supranational deliberating body. But it’s important not to lose sight of the enormous sea change that has already occurred. The euro zone has placed a fiscal safety net under all its members, and the European Central Bank has taken measures to intervene in the sovereign bond market that would have been unimaginable even last year.

Some have argued that none of this would have been necessary had German Chancellor Angela Merkel agreed to more concrete bailout measures for Greece when the crisis first erupted, but I’m not convinced of that. And given the significant gaps that needed to be filled for truly effective and sustainable economic governance to fend off future crises, I’m not sure how desirable such a symbolic solution would have been in the long run.

As for the effective and sustainable economic governance that is needed, there are some emerging points of consensus. To begin with, everyone realizes that the common currency cannot survive future shocks without greater fiscal discipline and economic coordination among the member states — meaning greater respect of the budgetary deficit and sovereign debt restrictions placed on eurozone countries.

Everyone also agrees on the need for that discipline and coordination to be based on a more formal mechanism than simply the individual “honor system” that has now been demonstrated as insufficient. The two principle gaps being addressed are an EU oversight role on national budgets, and an automatic penalization of member states that violate budgetary restrictions. What has also become perfectly clear is that the union lacks an effective crisis-management mechanism to deal with the economic and market events that brought on the current upheaval.

The discussion — and disagreement — now centers around how to put those mechanisms in place. On one side are the “constructionists” pushing for institutional and perhaps even constitutional reforms. On the other are the “fine-tuners” hoping to find ways of implementing such measures without resorting to new formal structures and treaties. The divide is in some ways misleading, as some of those advocating for new structures (Merkel) know that this would actually stall, if not condemn, the needed reforms, since any new treaty would face years of negotiations and referenda, with no guarantee that it would survive either. And many of those calling for creative interpretation and tweaking around the edges of existing treaties are in fact supporters of a stronger, more-federal union.

Significantly, and in contrast to accusations that he has been invisible during the crisis, it is European Council President Herman Van Rompuy who is coordinating the working groups on all fronts. So while Van Rompuy might not succeed in imposing himself as a political personality, he just might secure a more essential — if unexpected — role for the EU presidency than many initially anticipated following his nomination.

Because the debt-ridden eurozone member states lack the U.S. immunity to market fears of default, they must now hope that the current wave of austerity budgets sweeping the continent does not simply cause a second wave of the crisis to hit when growth inevitably suffers.

But in broader terms, the debate taking place right now within Europe is between two fundamentally distinct, if not frontally opposed visions of the union and its place in the global order. The first, championed by Berlin, sees the union as a means of securing Germany’s economic dominance of the continent, thereby securing its global economic competitiveness. The second, largely championed by Paris, sees the union as a means of projecting Europe’s, and thereby France’s, geopolitical influence in the world.

So far, the events of this year represent a significant setback for both visions — meaning that for now, the winner in the battle between Paris and Berlin is London. But assuming the euro zone can survive the current crisis, which I do, the union could very well emerge with a strengthened infrastructure and clarity of purpose that would provide it with a much-needed second wind for restoring its global status moving forward.