st faith that the euro zone’s economies, weaker or stronger, will
one day converge thanks to the discipline of sharing a single
currency, which denies uncompetitive stragglers the quick fix of
devaluation.
Yet the debate about how to save Europe’s single currency from
disintegration is stuck. It is stuck because the euro zone’s
dominant powers, France and Germany, agree on the need for greater
harmonisation within the euro zone, but disagree about what to
harmonise.
Related topics
Germany thinks the euro must be saved by stricter rules on
borrowing, spending and competitiveness, backed by quasi-automatic
sanctions for governments that stray. These might include threats
to freeze EU funds for poorer regions and EU mega-projects, and
even the suspension of a country’s voting rights in EU ministerial
councils. It insists that economic co-ordination should involve all
27 members of the EU club, among whom there is a small majority for
free-market liberalism and economic rigour; in the inner core
alone, Germany fears, a small majority favour French
dirigisme.
A “southern” camp headed by France wants something different:
“European economic government” within an inner core of euro-zone
members. Translated, that means politicians meddling in monetary
policy and a system of redistribution from richer to poorer
members, via cheaper borrowing for governments through common
Eurobonds or outright fiscal transfers. Finally, figures close to
the French government have murmured, euro-zone members should agree
to some fiscal and social harmonisation: eg, curbing competition in
corporate-tax rates or labour costs.
It is too soon to write off the EU. It remains the world’s largest
trading block. At its best, the European project is remarkably
liberal: built around a single market of 27 rich and poor
countries, its internal borders are far more porous to goods,
capital and labour than any comparable trading area. It is an
ambitious attempt to blunt the sharpest edges of globalisation, and
make capitalism benign.
The problem is that the “European social model” has become, too
often, a synonym for a very expensive way of doing things. It has
also become an end in itself, with some EU leaders calling for
Europe to grow purely in order to maintain its social-welfare
systems. That is a pretty depressing call to arms: become more
dynamic so Europe can still afford old-age pensions and
unemployment benefits.
Europe is in desperate need of good ideas and leadership. Too many
EU leaders have tried to secure voter consent for bailing out weak
links like Greece by murmuring darkly about “Anglo-Saxon”
conspiracies to destroy the euro, and presenting bail-out
mechanisms as a way to impose the will of the state over
“speculators”. Imaginary enemies are a desperate ruse to provide
the union with coherence.
The meltdown that wasn’t
Two scenarios can be plausibly sketched out for Europe in the near
term: one surprisingly positive, the other more negative. A
positive scenario starts with the fact that things could be much
worse. Think back 18 months or so, to a grim period marked by
violent anti-government protests in Greece, Latvia, Bulgaria and
Lithuania. The head of the Spanish confederation of employers’
organisations, CEOE, could be heard suggesting it might be time for
the free-market economy to take a “time out”, to allow for
government intervention. Politicians in Spain and Britain pressed
bailed-out banks to lend first to domestic businesses and
consumers. Greek authorities urged local banks to be “prudent”
about transferring capital to Balkan subsidiaries.
A senior official later identified an EU summit in December 2008 as
the moment of maximum danger for the free-market cause. At a
leaders’ dinner Nicolas Sarkozy, France’s president, berated the
European Commission for applying EU rules too rigidly. All around
him, heads nodded. If a show of hands had been called, the senior
figure felt, an “overwhelming majority” of EU leaders would have
voted to suspend the union’s internal-market rules.
An interactive guide to the EU's
debt, jobs and growth worries
In France spooked aides to Mr Sarkozy said a “European May 1968”
was brewing. Their boss suggested that billions of euros in aid for
the French car industry should be linked to keeping production in
France. It was, Mr Sarkozy explained, “not justified” for French
firms to make cars for French drivers in Slovak factories. Alarmed
at signs of growing east-west division, the Polish prime minister,
Donald Tusk, declared that the European ship was “rocking”, and
“they’re going to start throwing the weaker passengers
overboard.”
Mr Sarkozy’s protectionism was mostly virtual, it turned out.
French car firms continue to design thrifty little cars at home,
while building them in lower-cost Slovenia, Romania or the Czech
Republic. And the feared waves of civil unrest never came. From
Greece to Spain or Ireland, protests and strikes have—to date—been
smaller than expected, and dominated by public-sector workers with
unusually safe jobs to protect.
In October 2009 the European Commission intervened after Germany
was caught offering aid to sweeten the sale of Opel, a struggling
carmaker, to a consortium pledging to keep open all four Opel
factories in Germany (at the expense of more efficient plants
elsewhere). The sale later fell through. On the one hand, it was
worrying that Germany tried. On the other, it was a striking
display of the power of the EU single market: the German government
was told it could not spend taxpayers’ money to keep jobs in
Germany, without offering equal support to Opel factories in Spain,
Belgium, Hungary or Britain.
The single currency was always supposed to drive structural
reforms, as once-profligate countries were forced by the rules, and
their peers, to live within their means. Instead, France and
Germany led a rebellion against the disciplines of the “stability
and growth pact” on the first occasion it looked about to catch
them. That signalled a free-for-all. Less competitive members of
the euro zone, notably in the “Club Med” countries, stood idly by
as easy credit fuelled debt and asset bubbles, all the while
allowing wages to soar. With some mortgage rates turning negative
in real terms, it all felt like free money.
But northerners are also guilty of hypocrisy: it was German and
French banks that led the way in lending to Greece or Spain.
Lenders assumed that euro-zone sovereign debt was all rock-solid.
For those pocketing the extra yields on southern bonds, that too
felt like free money. In the words of one senior German, the root
cause of the sovereign credit crisis in the euro zone was that
markets at last “realised that giving credit to Greece is riskier
than giving credit to Austria.”
Northern governments also blocked early attempts at peer pressure.
EU leaders, it is said, knew Greece was lying about its deficit
figures back in 2008. Yet attempts to confront the then Greek prime
minister, Costas Karamanlis, a conservative, came to nothing. Mr
Karamanlis was shielded by fellow centre-right leaders, including
some of those who now shout loudest for budgetary discipline.
Lessons do seem to have been learned. German officials say there is
now bitter regret in Berlin that their country helped wreck the
original stability and growth pact. But wrecked it was.
Doing the right thing
European governments have nagged each other to carry out structural
reforms for years, without great success. As Jean-Claude Juncker,
prime minister of Luxembourg, said memorably in 2007: “We all know
what to do, but we don’t know how to get re-elected once we have
done it.”
Now, with markets shunning some Euro-laggards, doing the right
thing is a matter of survival. Long-stuck dossiers are finally
moving. On July 1st the European Commission announced plans to ram
through an EU-wide patent valid in all 27 countries (a key demand
of European business), after years of delays by Spain and Italy
over the status given to their languages.
Earlier this year, EU leaders like José Luis Rodríguez Zapatero of
Spain said flatly that market pressure on Spanish debt was a
conspiracy. “There is an attack under way by speculators against
the euro, against tougher financial regulation of the financial
system and of the markets,” he claimed. But with market pressures
reaching crisis point in May, Mr Zapatero reversed course,
announcing civil-service pay cuts and other austerity measures. He
unveiled a (modest) plan to ease Spain’s rigid labour laws, which
make older workers almost unsackable, leaving young and immigrant
workers on temporary contracts to take the pain when Spain’s
property-led boom turned to bust. At 40%, youth unemployment in
Spain is not just high; it is a moral indictment of an entire
system.
At an EU summit in June, Mr Zapatero led calls for the publication
of stress tests on European banks, a long-overdue measure being
resisted by some in Germany. While still grumbling about unfounded
rumours in financial markets (and he has a point), a more realistic
Mr Zapatero argued: “There is nothing better than transparency to
demonstrate solvency.”
Crucially for those who believe in a happy ending to this crisis,
voters seem made of sterner stuff than politicians feared, and can
also see the need for structural reforms. Between 2005 and 2030 the
working-age population of the European Union will shrink by 20m,
and the number of those over 65 will increase by 40m. Thanks to the
focus on crumbling public finances, that demographic time-bomb is
now a common part of European public debate. Governments in places
like Britain or the Netherlands have been able to propose paying
pensions at 67 or even 70, without angry protests.
Even in France, where most voters told an opinion poll in June they
considered a proposal to increase the retirement age to 62
“unjust”, few dispute the idea that the current state-pension
system faces insolvency. The left and right merely disagree about
who should pay to fix this. In Greece, the most disruptive strikes
have been staged by hardline Communist trade unions, with larger
unions showing some restraint. The press, meanwhile, is filled with
commentaries about how the country must live within its means, and
how much things must change.
Some of Europe’s most stubborn structural problems involve the
misallocation of public spending. Governments have spent years
padding civil-service payrolls, unveiling benefits like baby
bonuses or early-retirement payments just before elections, and
shovelling subsidies to politically powerful interest-groups.
Optimists have grounds for hoping that a squeeze on public spending
will bring about some structural reforms by default. Desperate for
swift cuts, governments have gone for slashing what they control
directly, starting with public-sector pay and government running
costs (including, in France, the presidential hunt).
The quest for growth is focusing minds on the most stubborn
structural problems. In Belgium members of the government admit it
is disastrous that just 35% of citizens between 55 and 64 still
work (in Sweden, the proportion is twice as high). In Germany
senior figures point to the barriers, such as patchy child care,
that keep too many women out of the workforce. Fixing this, they
suggest, could do more for domestic demand than deficit spending
ever would. Even the old debate about whether Europe needs an
industrial policy has been rendered less relevant, as governments
lack the cash for picking winners.
The shadow of corporatism
Yet all these elements do not have to lead to a happy ending for
Europe. Today’s austerity policies are risky, and may well swell
jobless lines in the short and medium term. Politicians fear high
unemployment, which can cow the toughest governments.
At the human level, complex interests may undermine reform. Take
Spain’s lost generation of unemployed youths. Many of them live
with their parents, notes a Spanish economist. In broad economic
terms their father’s job for life makes papa an insider, damaging
the interests of his “outsider” children. But papa also keeps the
household afloat: his children have a keen interest in labour laws
that keep their parent unsackable.
Public-sector workers, in particular, may look like privileged
insiders. But cuts will make many feel like victims. European state
workers are often badly paid, having consciously accepted low
salaries and tedium in exchange for job security.
Leading officials in Brussels say they have to convince voters that
Europe’s model of open borders is in the interests of the ordinary
citizen. The EU must craft regulation that is seen as stopping
abuses, especially in the financial sector, or “we will see the
rise of protectionism and populism,” says a senior Brussels
official. Talk of giving Europe a “social economy” from people like
Michel Barnier, a Frenchman and EU internal market commissioner,
means something like making capitalism cuddlier: Mr Barnier is, for
example, very keen on small local businesses.
The dangers are twofold. First, Mr Barnier and his colleagues are
under pressure to propose swathes of crowd-pleasing regulation,
especially in financial services. Second, cuddly capitalism has a
habit of turning into crony capitalism. Europe has shed socialism
as a ruling ideology, with even left-wing governments accepting
they have to work with markets. Corporatism, an old European menace
(think Mussolini), is a much bigger threat.
In Brussels competition regulators face intense lobbying from
businessmen, industrialists and many governments demanding that aid
and merger rules be eased, to help European champions withstand
global competition. Such lobbying exposes a deep dispute about what
the modern-day EU is for.
The EU was once a cosy club of western European countries. Now
27-strong, stretching from the Baltic to Cyprus and taking in ten
ex-communist countries, the union’s best justification may be as a
means of managing globalisation.
For free-market liberals, the enlarged union’s size and diversity
is itself an advantage. By taking in eastern countries with lower
labour costs and workers who are far more mobile than their western
cousins, the EU in effect brought globalisation within its own
borders. For economic liberals, that flexibility and dynamism
offers Europe’s best chance of survival.
But, for another other camp, involving Europe’s left (and more or
less the entire French political class), the point of Europe is to
keep globalisation at bay, or at least curb its power. According to
this thinking, single nations are too small to maintain high-cost
social-welfare models in the face of global competition. But the
EU, with its 500m people, is big enough to assert the supremacy of
political will over market forces. For such politicians, European
diversity is a problem because it undermines the most advanced
(meaning expensive) social models. Such competition must be curbed
with restrictions on labour migration from eastern Europe,
subsidies for rich-country production and lots of
harmonisation—including that old dream of the left, a European
minimum wage.
Even in a negative scenario, such voices would struggle to win all
their arguments: enlargement has given the newcomers a big say, and
they are not about to harmonise away all their advantages. In
private even French politicians know they need cheaper eastern
manufacturing, too. But if growth does not return reasonably soon,
the voices against free markets will grow ever louder.
A Franco-German compromise?
What, then, of the policy solutions being proposed by EU leaders?
Although France and Germany do not agree on the vital issue of
euro-zone governance, it would be wrong to assume they will
continue to disagree for ever. Eventually they will have to find a
compromise; though, alas, few of their clashing solutions currently
make sense.
Germany’s push for strict discipline is essentially for public
consumption. In private, senior EU officials admit that talk of
sanctions is nonsense. France and Germany will never accept being
fined or denied a vote, says one flatly. Fragile democracies in the
east would react horribly to losing their voting rights,
undermining all the EU’s hard work to make them more democratic.
Freezing funding for EU mega-projects is equally unworkable; such
projects often cross borders, so punishing one country leaves
others to suffer too.
As for the French-led camp pushing for redistribution to save the
euro, whether through bail-outs, common Eurobonds or a “fiscal
transfer union”, it has an equally fundamental problem: how to
square such integration with Europe’s democratic deficit.
Redistribution would require a giant leap towards political union.
There is no appetite for such a union just now.
How, then, will Europe try to save its single currency? By muddling
through, is the best guess. There will be bail-outs that are not
called bail-outs, “temporary” rescue funds for weak euro-zone
members that prove very hard to cancel, and semi-formal discussions
among member governments about their budgetary plans.
Will that be enough? That mostly depends on economic growth, and
whether Europe draws the right lessons from this crisis. An open,
flexible, competitive EU offers Europeans the best chance of
confronting globalisation. But that is not the only EU on offer: a
corporatist, cosy, populist union sounds very plausible to Europe’s
ageing, anxious voters. Big choices loom.
