0520 europe vaisse

8/6/2019 0520 Europe Vaisse

1/11

US EUROPE ANALYSIS SERIES

US EUROPE ANALYSIS SERIES May 20, 2009

A Rebo un d, not a Br eak-up: The Political Implications of the Economic Crisis for the Euro pean UnionJustin Va isse

Will Europe b rea k up? In the pa st six mon ths, thisquestion has suddenly gained currency and is

now being asked not just by worried andintrospective Europeans, but by observersacross the globe. And given the scope ofcurrent economic turbulence, there is noshortage of nightmare scenarios that couldlead to tha t end . The Eurozone c ould imp lodeunder the tensions generated by this first majortest to its unity, as Milton Friedman famouslypredicted . The c omm on m arket, which rema insthe cornerstone of the European Union, couldunravel under the wrenching pull of stealthprotectionism. EU institutions could increasinglya trop hy from the gla ring lac k of c risis leadershipand the tensions generated by publicsdemanding purely national solutions. EasternEuropean member states could suffer fatalblows and revolt against the perceivedabandonment of the West, while other hard hitc ountries from Ireland to G ree c e a nd Latv ia c ould t urn the ir bac ks on a Europea n Union soldto the m a s safe have n.

Not so fa st. While the re ha ve b ee n a numb er ofworrying developments caused by theec ono mic d ow nturn, and while this is no time tobe complacent or lack imagination, there arestill reasons to believe that Europe will not onlysurvive, but may even benefit from this crisis. Acase could be made that, in the final analysis,the net effect of the downturn will be to forceg rea ter unity upon Europe. Current t ensions c ancertainly be interpreted as the first cracks of animp end ing b rea k-up, but they c an also be seenin a very different light the normal andadaptive reaction of a healthy body to stress.Tha t b od y m ay suffer as a result of the a ssault,and will no do ubt feel miserab le for a time , but ,

as the saying goes, that which doesn't kill you,only makes you stronger. After all, if history isany guide, this would be nothing but a classicwith respe c t to Europ ea n c onstruc tion wherea period of dire crisis is followed by a reboundand the strengthening of the EU as an everc loser union. Things go horribly wrong b efo rethey get better but a full recovery occursprecisely because things got so bad. In otherwords, the events we are witnessing mayforetell not so much the beginning of the endas the e nd of the b eg inning fo r Europ e.

This pa pe r will be pub lished b y the Rob ert Sc huma nFoundation in June 2009 a nd will also b e a va ilab le inFrench.

ABOUT THE AUTHOR:

J u s t i n Va i s s e is a S e n i o r F e ll o w w i t h t h eCe n t e r o n t h e U n i te d S t a t e s a n d E u r o p e a t

B r o o k i n g s . H e a l s o t e a c h e s a t J o h n s H o p k i n s S c h o o l o f A d v a n c e d I n t e r n a t i o n a lS t u d i e s .


2/11


To a ssess the politic a l imp lic a tions of the c risis, itis necessary to determine first what theappropriate criteria for evaluation are,especially in terms of expectations and timeperiod . The c urrent threa t o f d isinteg ra tion is solarge that one could argue that simplyweathering the storm would be anac hievem ent. A sec ond sc hool of thought ma yuse a maximalist yardstick: because EUleadership has been lacking on bailoutcoordination or help for Eastern Europeanmember states, the crisis has already exposedthe union as a superficial construction built forfair weather only. In this light, even the recentinnovations to deal with the crisis, like theinvention of an implicit "no-default clause" forEurozone countries, as will be discussed later,are seen as a bare minimum and aninadequate response to the challenges beforeus.

My p osition is d istinc t from both the se sc hoo ls ofthought. First, while some lessons can alreadybe d rawn from the c risis, it is too soo n to pa ss acomprehensive judgment on recent eventsand their impact. We still don't know the fulldep th of the ec onomic d ownturn, nor ca n wefully gauge its social and politicalc onseq uenc es. The w orst m ay still lie ahea d forEurope. At this point, all we can offer is an

assessment of Europes initial response andtend enc ies a nd spec ulate on future p ossibilities.Sec ond , rathe r than fo c using o nly on the short-term imp lic a tions of t his c risis, my time frame foreva luation is the midd le term the next 5 to 10yea rs. Fina lly, my exp ec ta tions for EU institutionsare not maximalist; I do not expect that thecrisis will precipitate a super-federal EU state,nor do I wish it would. I am hoping for morethan survival, however, and if current tensionscan bring about new instruments of solidarity,force more unity and coordination amongsta te s, and d em onstrate tha t the institutions a rehere to stay, then the EU will have not onlypassed its first serious test but will ultimatelyem erge strong er a s a result.

1. Doomsday scenarios: Be afraid. Be veryafraid.

a) A populist and nationalistic wave againstEurope

The re is no rea son w hy the c urren t c risis sho uldremain consigned to economic textbooks. Ashistory shows, major economic downturns tendto degenerate into social crises, which in turnc rea te p olitic a l turmo il. The mo st sa lientanalogy here, of course, is Germany in the1930's where economic distress and socialupheaval led to the rise of Nazism. Massiveunemployment now forecasted to reach upto 26.5 million in the EU could bring socialunrest, demonstrations and violence (like thatseen in Latvia in January 2009). Severalnegative outcomes could emerge from thisde teriorating c lima te. A po pulist lea de r elec tedin a member state could take advantage ofthe situation to use Brussels and neighboringcountries as scapegoats and startimplementing beggar-thyneighbor policies. Amore mainstream government couldconceivably do the same if sufficientlyp ressured b y the stree t. This c ou ld signa l toother governments that it is acceptable toadopt uncooperative policies, and in turn,encourage them to follow suit and further

po ison the Europ ea n climate .We have already seen some signs of backlashagainst EU policy, especially in the laborma rket. The UK is c ertainly the mo st o pencountry in this respect, with nearly 15% of itsc urrent w orkers foreign b orn. This fac t he lpsexplain the wave of strikes launched across thecountry in early 2009 against the hiring offoreign workers, with the slogan taken (partlyout of context) from Gordon Brown's ownwords, "British jobs for British workers" 1. Tha tslogan makes clear the common source forsuch scenarios: While free-market and free- 1 Nico Hines, Andrew Norfolk and Christine Buckley,"Wildcat strikes over foreign workers spread acrossBrita in", Times Online , January 30, 2009.


3/11


circulation rules are European, social policiesand state aids for ailing industries are paid forby national budgets, and in times of crisis,ta xpa yers wa nt to m ake sure tha t their mo ney isput to use in their c oun try.

How likely are such scenarios of populism andvicious cyc les of g o-it-a lone p olicies? So far,there ha ve b een surp risingly few ga ins ma d e b yextreme-right and extreme-left politicians, or byEuroskeptic political groups across the EU,including in Eastern and Central Europe wherethe impact of the crisis is most severe 2.Moreover, the analogy of the 1930's seemsflawed in many respects: the social crisis wasmuch deeper then, governments were not asconvinced of the importance of maintaininginternational discipline, and the catastrophesof 1930's had not yet ha pp ened and thus hadnot yet bee n etche d into Europ ea nconsciousness. While anger may be a verypowerful emotion, it is counter-balanced inpublic opinion by another very powerfulem otion fea r. The fea r of a situation mad eeve n w orse by ra sh a c tions a nd inward-loo kingpolicies has had a moderating effect. It isstriking that deteriorating economic conditionsin France have led neither to massivedemonstrations nor to a rise of anti-Sarkozyforces (indeed, at this point, the ruling UMP

party seems poised to win the Europeanelections, which wo uld be a po litica l anom aly).

b) The slow de ath of the c omm on ma rket

A second set of scenarios is largely a variationon the first, but c ente rs on the c om mo n ma rket,the cornerstone of the European project sincethe 1950's. While a populist leader or anendangered government could enactblatantly protectionist decisions, it is more likelythat the intra-EU free flow of goods and capitalwill be threatened by stealth protectionism measures that distort the common market inind irec t w ays. There have alrea d y be en a few

2 Eurac tiv.co m, "Crisis 'not he lping ' Eurosc ep tic s ga inc on sen sus", March 27, 2009.

examples of these in the recent months, andtheir proliferation could quickly lead torecriminations among states and adeterioration of the trust and credibility onwhich EU ec ono mic life relies.

Faced with the crisis, some governments haveenc ourag ed their pop ulation to "buy na tional",like the "buy Sp anish" ca mp aign orche strat edby Miguel Sebastian, Minister for industry,tourism and commerce 3. If no government hasactually required national economic actors,even those helped by state bailouts, to "buynational", some have come very close,especially in the process of rescuing or evennationalizing banks. By "making public supportconditional on domestic lending, therebycrowding out foreign-owned competitors,"some states like the UK have come close tocrossing the red line 4. The Frenc h auto ba iloutra ised simila r conc erns. When Sa rkozy d ec laredon February 5 th , "If you build a Renault plant inIndia to sell Renaults to Indians, that's justified,but if you build a factory [] in the CzechRepublic, to sell cars in France, that's not

justified," he was hinting at possible restrictionsincompatible with EU rules. But the EuropeanCo mm ission e ven tua lly c lea red Sa rkozy's autobailout plan, implying it did not cross any redline (see more on t his below ).

More generally, one of the biggest dangers forthe common market is not the illegal stringsattached to bailouts, but bailouts themselves.Som e states are temp ted to take ad vanta ge o fthe crisis and go beyond what is permissibleunder EU rules, citing extraordinary times. And ittakes time for the Commission to review eachindividual bailout and all investigations, like theone rece ntly launc hed on the Dutc h rescue ofFortis Bank, are made ex post . Fina lly, theinequality between large states, which canafford stimulus p ac kage s a nd state a id s to their

3 Victor M allet, "Sp ain unv eils 4bn aid for mo torindustry", Fina nc ial Times , Feb ruary 14, 2009.4 Wolfgang Mncha u, "The e urozone need s a c o-ordinated strategy", Fina nc ial Times , April 27, 2009.


4/11


own industries, and small countries whichcannot, introduces unfair competition and alsoposes a serious risk to the common market.While there is nothing illegal here, this situationc ould lea d to resentm ent, all the m ore so g iventhat some small states will be in an increasinglyd iffic ult fina nc ial situation.

c ) A break- up of the Ec onom ic m onetary Union(EMU) or a ma jor ba nk c ollapse

A third doomsday scenario focuses on the 16-c ountry Eurozone , and mo re sp ec ific ally on thepossibility of either seeing the euro unravel orseeing countries leave the Eurozone. Here,some of the biggest fears are linked to thephenomenon of bonds spread. As Jean Pisani-Ferry exp lains, [Eurozone sta te s] a ll loo ked thesame for a long time . The rec kless and thevirtuous ones, the sneaky and the upfront ones,a ll the m em b er count ries of the e uro a rea we retreated identically, or nearly, by capitalmarkets" 5. But with the crisis, bond markets aregetting very worried about the ability of somec oun tries (Spa in, Gree c e, Portug a l, Ireland a ndothe rs) to p ay the ir de bt ba c k. So "theydemand a higher premium on governmentbonds issued to raise the c a sh. The mo re thedoubts and debts, the more the markets askgovernments to pay to service their borrowing

and all the more indebted governmentsbec om e, exp lains Bruno Wate rfield in Brussels. This is the vic ious sp ira l tha t threa tens to t ea rboth the euro and the EU apart" 6. Faced withgrowing economic and social pain, countrieswhich now cant use either their monetary orbudgetary instruments may be tempted todefault on their debt or even to opt out of theEurozone. "EMU break-up clearly remains astrong trad ing the me and a n umb er of investorscontinue to anticipate that at least a few

5 Jea n Pisa ni-Ferry, "The euro sorely te sted by na tiona lc rises", Le Mo nde , Jan ua ry 27, 2009, Eng lish v ersionac c essible at http://www.bruegel.org/10742 6 Bruno Wate rfield , "Europ ea n d isunion: Is the EUc rac king up ?", Bruno Wat erfield blog , February 9,2009.

countries will try to go back to their oldc urrenc ies," sa id Thom a s Sto lpe r of G oldmanSac hs in ea rly 2009 7. What wo uld ha pp en then?"A sovereign default would inevitably triggercontagion, Pisani-Ferry explains, as financialcrises always do." 8 This, in turn, co uld e nd angerthe w hole Eurozone .

But this is not the most likely scenario, andbonds spread has tended to stabilize and thennarrow sharply in April 2009. As for the risk ofseeing a Eurozone country default on its debt,Berlin a nd Brussels ha ve sta ted tha t the y w ouldintervene beforehand, thereby inventing a"solidarity clause" to complement the "nobailout clause". And of course, it is hard to seehow the c ost of opting out co uld b e lower thanthe c ost of sta ying in.

But this is not the end of possible troubles. Amore likely doomsday outcome would belinked to a major bank, not a small country,collapsing, as Nicolas Vron of the BruegelInstitute has noted 9. There a re tw o p ote ntialscenarios which should keep Europeans awakea t night. The first one w ould be the inab ility ofsmall and weak countries to participate in anEU-wid e b ank b a ilout, or even to resc ue o ne o ftheir own banks, because of their financialdifficulties and of the excessive cost of

bo rrow ing on the b ond s ma rket. The sec ondone is eq ua lly wo rrying. It may be tha t Europe isunwilling, or institutionally unable, to coordinatethe rescue of one or several of its hugemultinational banks. After all, according to theIMF, European banks hold more bad assetsthan American ones ($1,426bn versus $1,050bn)and have written down much less. Capital

7 Quoted by Peter Ga rnham , "Fea r over wea kersta te s hits euro", Fina nc ial Time s , January 17, 2009.8 Pisani-Ferry, op . c it.9 Cf. Jea n-Fran ois Jam et , Franc k Lirzin, "L'Europ e l'preuve de la rc ession", Questions d 'Europ e n130,http://www.robert-sc huma n.org/ que stion_europe.php ?num=qe-130 ,and Nic olas Vron, "Le no eud go rdien d es ba nqueseuropennes", La Tribune , Ma rch 11, 2009.


5/11


injections of $275bn would be required in theUS, versus $500bn in Europe 10. If countries can'tbail out their own banks, will Europe really be ina po sition to ta ke over?

d) A ne w iron c urtain b etwe en East and West

Eastern Europe is in a particularly precariousposition with respect to its financial situation,and a fourth worst-case scenario centers onthe exacerbation of division between East andWest b y the c risis. Since the end of the Co ldWar, Eastern Europe has received massiveinjections of investment and capital from theWest, and this movement was encouraged bythe accession of most of these countries intothe EU 11 . But the crisis has caused a rapiddecline in exports to the West and repatriation of funds by Western banks especially fromAustria , Sweden , Ita ly, etc . This ha s led toc urrenc y de valua tion (exce pt fo r Slovakia a ndSlovenia , which a re a lrea dy in the Eurozone ),increased financial difficulties (especially forsome loans which had been contracted ineuros or Swiss francs) and, in some places,social unrest. While some countries such asPoland and the Czech Republic have resistedthe impacts that have befallen nations likeHungary or Latvia, Eastern European countriesas a whole have suffered, and they have

sta rted to resent w hat the y pe rc eiv as a lac k ofsolidarity from larger Western member states.The former Hunga rian Prime Ministe r spokeabout a "new iron curtain" during the March 1 st EU summit, while Robert Zoellick, the presidentof the World Bank, warned that Europe riskederasing the p olitica l ga ins ma d e during the last20 years. As will be mentioned below, somesteps ha ve b ee n ta ken to a dd ress this situat ion.

Still, one doomsday scenario lies in the possiblecollapse of an Eastern country, which would

10 IMF figures quo ted by Wolfga ng Mnc ha u, op . c it.11 Cf. Franc k Lirzin, "L'Union e urop e nne fac e a u dfide la c rise d es pa ys d'Europe c entrale e t orientale",Questions d'Europ e n134, http://www.robert-sc human.org/ question_europe.php ?num=qe-134

not only have damaging economicconsequences for Western banks but, moreimp ortantly, would lead to a po litic al b ac klashagainst the EU in the region. (A collapse ofUkraine would also send shock waves, althoughless politically damaging, throughout theregion). An added danger could be a Russiathat see ks to exploit the o p po rtunity to inc rea seits influence in the region by bailing out EasternEuropean countries with better terms than theEU or the IMF. Moscow has reportedly set aside$7.5 billion for this task 12. If the c risis d rag s onover the next years, a less spectacular, butmo re likely outc om e is the grad ualimpoverishment of Eastern Europe,accompanied by rising bitterness andresentment vis--vis Western Europe a slowestrangement from the common destiny andan incremental erosion of the European dreamin the hea rts and minds of Easte rn Europea ns.

e) A c entrifuga l political p rocess lead ing to softpartition

It is a c om pa rab ly slow p roc ess of d rifting a pa rtwhich could prove the most threatening toEurope at its core. In the fall of 2008, wewitnessed strikingly different responses by theUK, Franc e and Ge rmany to the c risis. The Britishstimulus focused on boosting demand, the

French plan on strengthening supply, and theGermans, at first, didn't want any stimuluspa c kage wha tsoe ver. These d ivergentstrategies may hint at things to come, as theeconomic crisis continues to exacerbate thedifferences between national economicc ultures a nd struc tures b etw een the finan c ial-centered credit-addicted British economy, thedomestic-driven and state-centered Frencheconomy, and the export-driven inflation-ad verse German ec onom y.

12 Tom a s Va lasek, "Ec onom ic c risis and the 'ea sternpa rtnership' ", Ce nter for Europe an Reform, M arc h10, 2009,http://centreforeuropeanreform.blogspot.com/2009/ 03/economic-crisis-and-eastern-partnership.html


6/11


The d ang er here is to a llow these d ifferenc es tobecome so significant in policy-making duringtimes of crisis that they become irreconcilableand make economic coordination impossible.With time, that would cause skepticism tocreep into all common policies and lead toslackened discipline and adherence, withmajor countries maintaining rhetoricalcommitment to European unity while in realityflouting the rules of the ga me , sta rting with theSta b ility and Grow th Pac t. In the w orst-ca sescenario, if this tendency is met with a lack ofleadership and vision and a climate of mutualrecrimination, it could lead to something likeEuropean deconstruction, or even a "softpartition" of the EU.

2. What doesnt kill the EU makes it stronger: thec ase for survival a nd rebo und

European disintegration is neither certain norunimaginable. In spite of Europes manyvulnerabilities, of the striking differences thatremain between member states, and of theab senc e o f a strong feeling o f co mm on identityamong populations, the European constructionhas deeper roots and a more robust structuretha n m ost o b servers perceive. The c a se I willargue in the second part of this paper is that

the forces and the "logic" of Europeanintegration and interdependence are strongerthan the c entrifuga l pop ulist force s, even andespecially in times of crisis. Indeed, I believethat not only will the EU not break up, but thatthe tensions generated by the economicdownturn will lead to greater European unity,though it may b e a mod est increase.

Let's start with a few preliminary observationsand some good news about the currentsituation before getting to the core of theargument in favor of a reb ound.

Countries want to join, not quit, the EU and theEurozone

Judging by their popularity, the EU and theEurozone are no t e nda nge red spe c ies. Not onlyis there no discussion among member statesab out leaving o r red ucing offic ial co mm itments(not even euroskepticism, it has been noted, ison the rise), but since the crisis began, evenmore c ountries are ap plying to b ec ome pa rt ofthe c lub. This is som eho w c om pa rab le to thefa te of the US d olla r in the c urren t c risis:whatever their current vulnerabilities, these areinstitutions that people consider safe, reliableand p rote c tive in times of turbulence . So fo rexample, recently elected Prime MinisterJoha nna Sigurda rdot tir of Ice land sa id shehope d to hold a referendum on joining the EUwithin 18 months, reversing a long-heldIcelandic position. And the euro has had apowerful shielding effect for those integrated,as Jean-Franois Jamet and Franck Lirzin havenoted 13 . So it is no wonder that some EastEuropean countries want to expedite theirac c ession to the co mm on c urrenc y. Poland , forexample, discussed possibly speeding up itsentry into the Exchange Rate Mechanism 2(the antechamber to the Eurozone). Even thedebate in the UK has been renewed becauseof the crisis. Just next door in Ireland, where

53.4% of its vo te rs rejec ted the Lisbon trea ty in aJune 2008 referendum, the public seems tohave had a change of heart since theec ono mic d ow nturn. Op inion po lls on thefavorability of the treaty started to reverse inthe fall of 2008 and are now stable at around52-54% in favo r of the treat y.

Europ e kee ps mak ing p rog ress

This pa per foc uses on t he politic a l, ra the r tha npurely economic, implications of the crisis forEurope. Its underlying assumption is that thedownturn might do more than just economicdamage. But the reve rse is true a s we ll. Europe'sresistance and resilience will partly come from

13 Jam et , Lirzin, op .cit.


7/11


its solidity in other domains, from its overallcredibility and image as a political entity in theeyes of Europeans, non-Europeans, and thema rkets. And in the rec ent mo nths, in sp ite of itsinstitutional problems, Europe has scored somenot ab le suc c esses, espec ially wh ile Franc e he ldthe rotating presidency of the EU 14. Two ofthese ac hievem ents de serve to be me ntioned .On c lima te c hang e, Europ ea ns ap proved afar-reaching and binding agreement on aprogram to drastically reduce CO 2 emissions(the "2020 agenda"), establishing the EU aglobal leader in efforts to move to a low-carbon economy. On security and stability,Europeans launched the EUNAVFOR Atalantaoperation against piracy off the coast ofSoma lia the first na va l mission in EU histo ry. Thismission is signific ant not only bec a use it is a trulymultinational effort and has already made atangible difference in the region, but alsobecause the operation provides a globalpublic good to all countries while activelydefending Europes own direct economicinterests. These two examp les show tha t th eeconomic downturn has not stymied Europe'smo me ntum for other initiatives and c onfirm tha tthe union is much more than an economicassociation.

There should not be a uniq ue rep ort ca rd for

European institutions Since the beg inning of the c risis Euroskep ticsand European enthusiasts alike have had harshwords for EU institutions. They are justified in theircriticism of the European Commission, whichhas performed rather poorly and revealed anum ber o f w ea knesses. This is pa rtly the result o fa long-term shift in power away from theCommission and towards the Council, but it isalso due to Jos Manuel Barrosos lack ofleadership. If major crises offer windows ofop po rtunity not to be wa sted , then the BarrosoCommission has clearly squandered the

14 See Fed eriga Bindi, Cha rles Kup c ha n, Justin Va isse,"Sa rkozy's Europ e is Go od for Ob ama ," International Hera ld Tribune , January 14, 2009.

cha nce to enhance its role a nd to e mbo dyEurope a n interests. It ha s failed , for exam p le, tooffer more coordination and leadership onstimulus packages and to initiate an EU-wideauto industry b a ilout . The d ivided Czec h EUpresidency has fared only marginally better,requiring urging by Germany and France totake action and organize a special summit toad dress the ec ono mic c risis 15.

There shou ld no t b e just one sc orec a rd for allEuropean institutions, however, as some havereacted much better to the crisis. A case inpoint is the European Central Bank (ECB), arelatively young institution with a limitedmandate that has managed to retain its fullcredibility while charting new territory. Itaggressively injected liquidities into the marketwhen the crisis started in August 2007 andena c ted a 3.25-p oint interest rate c ut betweenOctober 2008 and May 2009. It is also findingnew flexib ility in the too ls a t its d isp osa l and c a nincreasingly come to the rescue of theEuropean economy. While not engaging inqua ntitative ea sing per se , something it cannotnot do as easily as its American and Britishcounterparts (among other restrictions, the ECBcannot buy state debt), it is currentlyimplementing non-conventional policies, suchas asset purchases (intervening directly in the

ma rket for corporate de bt)16

and the purchaseof 60bn euros in c ove red b ond s (bond s sec uredby m ortga ge po ols or public de bt) a s a furthermeasure to promote lending 17. It is also"extending the maturity of its basic refinancingop erations in norma l time s a we ekly eve nt to 12 months," thereby substituting itself to the

15 Cf. Jean Quatremer, "Prague contraint dec onvoq uer un somm et e urop en extrao rdinaire",Co ulisses de Bruxelles blog , Feb ruary 9, 2009,http://bruxelles.blogs.liberation.fr/coulisses/2009/02/prague-contraint-de-convoquer-un-sommet-

europ%C3%A9en-extraordinaire.html 16 Ralph A tkins, "ECB rea d y to p ut p olicy too ls towork", Financ ial Time s , April 30, 2009.17 Ca rter Doug herty and Julia Werdigier, "Ce ntralBanks in Europ e Ea se C red it Policie s Furthe r",Int e rnatio na l Hera ld Tribune , May 7, 2009.


8/11


faltering inter-bank lending and injectingliquidities in the Europea n fina nc ial system 18.

Interestingly, other lesser known Europeaninstitutions ha ve a lso be en a b le t o he lp with thecrisis, such as the European Bank forReconstruction and Development and theEurope an Investment Ba nk. The latte r hasincreased its capital by 67bn euros, bringing itto 232.4bn, in order to rapidly expand itslending volume as part of anti-crisis measures.In other words, some leaner EU institutions arefinding greater flexibility in their mandates andrespo nding c onstruc tively and c rea tively to thedownturn.

The system is wo rking even if it's hurting

The ide a of issuing joint EU b onds, or EU-ba c kedgovernment debt, as suggested by severalwell-known personalities like EurogroupPresident Jean-Claude Juncker, could havebeen mentioned in the previous section on theflexibility and responsiveness of some EUinstitutions. 19 The ob jec tive o f suc h EU bond s, ofcourse, would be to ease the impact of thebo nd s sp rea d on w ea ker c ountries by p rovidingthem with cheaper credit to respond to thec risis. Sta te s like G erma ny a nd the Nethe rland s,however, are protesting the idea, as it would

make it more costly for them to borrow jointlywith Gree c e, Spa in, Ireland a nd o the rs.

So the question begs, is this a failure a sign ofthe inflexib ility o f EU institut ions, or is it a hea lthyand corrective adjustment enforced by thesystem? Afte r a ll, the re is no rea son whyeconomically stable countries should pay thesame interest rate as more irresponsible ones,since the former carry much less risk than thelatter. And if the latter do n't pa y a p ric e for theirundisciplined budgetary behavior, thenincentives for good governance in the EU areunde rc ut. The sam e c ould b e sa id of the "no

18 Op . c it.19 Cf. Eurac tiv.c om , "Almunia ba c ks EU bond s, haseurozone ba ilout pla n", Eurac tiv.c om , Ma rch 4, 2009.

bailout clause" and the interdiction to the ECBto buy sta te d eb t. These restric tions may bepainful for some countries and may bechallenged by some critics as an insult tosolidarity, but they ensure that the riskierc ountries do n't indulge in p olic ies that wo uld bede trime ntal to the EU a s a who le.

A similar phenomenon could occur in thepolitic a l and institutiona l sp here. Ta ke the lac kof coordination on stimulus packages, or thed ispute ove r the auto industry b a ilout . The"European system" worked somewhat, in thesense tha t Ge rma n, Sp anish and , perhaps moreimportantly, even French auto bailouts wereclosely examined and then approved by theEuropean Commission, after it was determinedthat the common market was not at risk. But,the fact that countries had to go it alone withneither the Commission nor the Czechpresidency taking the initiative to coordinate apa n-Europ ea n b ailout c onstituted a notic ea bledisappointment for supporters of a moredec isive EU. The op timistic ta ke o n th is,however, is that these perceived missteps mayprove to be just the right spur towardsachieving the first real steps of adaptation,innovation and closer unity of action. Preciselybecause the levels of attention and alert wereelevated, the Commission and the Council

were harshly criticized, and the peopleconcluded more Europe was necessary, wemay in fact see greater appreciation of theissue next time and a better, morecomprehensive response.

But let's ge t b eyond these ge neral ob servationsand examine now the three main reasons whyEurope could not only survive, but also bereinforced b y the c risis.


9/11


a) The log ic of integ ration: "too interdep ende ntto fail"

The c entral argume nt a ga inst the brea k-uphypothesis is the profound interdependencec rea ted by the Europ ea n c onstruction thatmakes partitioning (even soft partition) ordeconstruction extraordinarily costly. It similarlyma kes it ve ry diffic ult for large sta tes to just leta weaker member of the Eurozone or the EUcollapse. In other words, Europe will survive,and could even get a bounce, not out virtueand co urag eous lea de rship which ha ve b eensorely lacking so far but out of necessity andfear. Pressed by restive public opinions, policymakers could contemplate unilateral andbeggar-thy-neighbor options, but their cost islikely to remain considerably higher than thepursuit of European unity for some time toc om e. Take the examp le of Eastern Europe. Intimes of growth, there wa s dyna mism be twe enold countries and new countries, between"givers" and "takers" new markets for theformer, sustained investme nt a nd de velop me ntfor the latter. This c rea ted a d ee p e c ono micinterdependence which makes it impossiblenow for major economies in the West to cuttheir Eastern counterparts loose for fear ofseeing their banks and corporations take a

sizeable hit and their stability and Europe's asa whole threatened .

There have alrea dy b ee n c onc rete signs ofresponse. In spite of complaints about lack ofsolidarity for Eastern European member states,the EU twice doubled its macro-economicsupport for EU members outside the eurozone,from 15 to 25bn euros and from to 25 to 50bneuros. 20 IMF lending has been boosted, thanksin pa rt to West Europe a ns, and this bene fits theEast. "Out of the 20 programs launched sincelast summer, 11 are for countries in the region,wrote Ste fan Wag styl of the Financ ial Time s a tthe end of A pril. The Europ ea n Union is a lso

20 Eurac tiv.co m, "EU sec ures 50bn to ba il out newme mb ers", Ma rch 20 2009.

contributing, notably with aid for crisis-hitmember states such as Latvia." 21 And whatabout countries inside the eurozone whichco uld de fault on their de bt, such as Greec e o rIreland ? The trad ition here is the "no ba iloutclause", intended to avoid moral hazard. Butfaced with such a severe crisis, Germanystep ped in. In Feb ruary 2009, Pee r Ste inbrck,the G erma n Financ e Minister, d ec lared "Theeuro-region treaties don't foresee any help forinsolven t c ount ries, but in rea lity the other sta teswould have to rescue those running intodifficulty."22 This "solida rity c lause", which nowcoexists with the "no bailout clause", wasreaffirmed by Joaquin Almunia, the monetaryaffairs commissioner, shortly afterwards: "If ac risis em erge s in one eurozone c oun try, the re isa solution before visiting the IMF. Its not cleverto tell you in pub lic the solution. But the solutionexists." 23 What this imp lic it rea ssuranc e me ans isthat large states like Germany would not letothe r eurozone c ountries go ba nkrupt , even if itwould be politically very costly for them top reve nt the ba nkrup tc y. This is a signific a nt ne wstep tow a rd s a m ore integ rate d Europ e.

b) Other powerful counter-forces to the rescue

Before it is forced to react to the impendingfailure of a member state, the EU can rely on

several political counter-forces to avoid"European deconstruction": the market, eliteop inion and pe er p ressure.

Eco nomic interdep endenc e be tween mem berstates has rendered protectionist measures including stealth protectionism largely self-defe a ting. Nic ola s Sa rkozy's d ec laration o n thelocalization of auto industries, for example, was

21 Stefa n Wa gstyl, "Pola nd 's c red it line is a sho t in thea rm fo r Eastern Europ e," Financ ial Time s , Ap ril 27,

2009.22 Bertrand Benoit, Tony Ba rbe r, "Ge rma ny read y tosupport eurozone action", Financ ial Time s , Feb ruary19, 2009.23 Quo ted by Tony Ba rber, "Eme rgenc y eurozone a idsignaled," Fina nc ial Times , Ma rch 3 2009.


10/11

US EUROPE ANALYSIS SERIES 1

me t b y a reta liat ory threa t from Slovakia to shutits promising market to Gaz de France. Moreimportantly, industries themselves have reactedneg at ively. The hea d o f the Frenc h c a rma kerPeugeot pointedly insisted that his Czech plantwould stay open while 3,000 jobs in Francewould go, and Volvo (which owns RenaultTruc ks) preem ptively a nnounc ed it wo uld refuseprop osed stat e a id in order to retain its free do min dec id ing whe re to loca te a c tivities. Ironica lly,Europ ea n inter-d ep end enc e is so extensive tha teven protectionist-minded measures end upbenefitting other countries. Auto bailouts in thelarge Western countries, for example, ensurethat Eastern European factories remain open.And car-scrapping schemes, intended to boostdemand in the West, has exactly the samebe neficial effec t o n Eastern plants.

One of the most worrying scenarios for Europewould be one in which populist andnationalistic policies spread from one countryto the other, leading to the slow demise of theEU. But before this could happen, there arevarious layers of resistance that must first beovercome, starting with the very powerfulc omm on ideology tha t binds Europ ea nstogether. Elites and public opinions can argueabout the optimal institutions and policies forEurope, its degree of federalism v. national

sovereignty, etc., -- but Europe remains thehorizon of all political and economic debates.There simp ly are no c red ible forc es a t this pointoffering an alternative to policies made insidethe Europ ea n fram ew ork no sta nda rd -bea rer,except for old ones (like British euroskeptics, tosome extent), for a policy of going it alone orgo ing ba c kwa rd s on integ ra tion. In othe r wo rd s,taking steps that would undermine "thec om mo n house" is still a t aboo .

This lead s us to the third c oun te r-forc e aga instthe disintegrating effects of the crisis, peerpressure among policy makers and elites. Notonly is Europe bound by a powerful commonideology, but there is also a constantsurveillance and consideration of eachme mb er stat e's eve ry mo ve. Insta ntane ous

and, if necessary, substantial pressure can beap plied by m emb ers on one another in order topreserve the common market and theEuropea n c onstruct ion. Outside ob servers mig htbe forgiven if they thought that Europe was onthe b rink of c ollap se d uring the Fa ll of 2008 andthe winter of 2009, so loud were the cries andcriticism against any action even remotelyconsidered threatening to the EU. AngelaMe rkel and Nic ola s Sa rkozy, resp ec tively on theissue of the stimulus and the auto bailout,triggered considerable disapproval, eventhough their initiatives presented little actualda nge r to Europ e. But tha t o ver-rea c tion wa s atestimony to the vigilance of pro-Europeanforces.

c) Institutions and leadership: the worst is notalwa ys c ertain

There is no do ubt that Europ ea n lea de rs havenot be en ve ry imp ressive since the b eg inning ofthe crisis. While the case made here, thatEurope will weather the crisis, relies not onleadership but on structural factors, it cannotbe ruled out that in later stages of thedownturn, major European figures andinstitutions may get their act together andeffec tively take c ha rge . This transforma tioncould come as early as the second part of this

yea r, and it is pe rhap s even ea sier to ima gine anumber of optimistic scenarios where this playsout than the d ire foreca sts d esc ribed ea rlier.

First, a more decisive European Commissionunder a new leader might emerge, one thatwo n t "wa ste the c risis" a sec ond time and ta kesadvantage of the situation to offer greaterleadership a nd c oo rd ination. The Lisbon trea tymay be finally ratified (largely thanks to thecrisis, and the fear it incites), which putsinstitutional questions aside for the first time in adecade, slightly improves EU governance, andmarkedly improves the climate for Europeanpolicy-making. A more decisive EuropeanCouncil, whether in the form of the newpermanent President or a good workingrelationship b etwe en the p ermanent hea d a nd


11/11

0520 europe vaisse

Documents