‘The Tragedy of the European Union’

The Tragedy of the European Union: Disintegration or Revival?, by George Soros with Gregor Peter Schmitz, Public Affairs RRP$22.99 / £15.99, 208 pages

Nearly five years on from the start of the eurozone crisis, even its most strenuous critics have to admit that things are looking better for the currency union. Bond yields in troubled countries have fallen sharply from the levels reached in 2011. True, public debt is still rising and unemployment, particularly among the under-30s, is still worryingly high. But as the recovery gathers pace, the hope is that the fiscal outlook will improve and companies will resume hiring.

In the face of this mild optimism, George Soros’s book The Tragedy of the European Union appears to be badly timed. It includes a series of interviews with the 83-year-old US financier by Gregor Peter Schmitz, Europe correspondent of the German weekly Der Spiegel. Soros’s central argument – that the eurozone faces a long period of stagnation and the risk of disintegration unless it radically renews its institutions – is hard to square with the incipient upturn.

Yet leave aside these few quarters of growth and concentrate instead on the long run, and Soros’s trenchant critique appears on the mark. Since 2009, eurozone states have taken important steps to strengthen the institutions created by the Maastricht treaty. One could list several leaps forward, including the establishment of eurozone-wide rescue funds, the European Financial Stability Facility and its permanent successor, the European Stability Mechanism, which have already been tapped into to rescue Greece, Ireland, Portugal, Spain and Cyprus. As the crisis has abated, so has the eurozone’s reformist drive.

A prime example is what has happened to the “banking union” that the eurozone vowed to build to shield weaker sovereigns against future banking crises. Sadly, policy makers have fallen short of creating a sufficiently large single pot of money that can be used to restructure banks. Any burden that cannot be imposed on equity- and bondholders will again fall on the shoulders of individual countries. As Soros puts it, “The so-called banking union has been transformed into something that is almost the exact opposite. Instead of creating a European banking system, it re-establishes national silos.”

For the Hungarian-born billionaire, the “tragedy” of the EU has a clear culprit: Germany’s political class – in particular, chancellor Angela Merkel. For much of the postwar era, Soros argues, “Germany was always willing to give a little more, and take a little less. That is what made the process of integration so successful for a time.” This approach changed when Germany finally reunified in 1990. Reunification turned out to be expensive and this changed its attitude vis-à-vis the rest of Europe.

Soros’s book initially reiterates the call he made in an essay for the New York Review of Books in 2012. Germany should lead its partners towards a more integrated eurozone that would involve, for example, the issuance of mutually guaranteed debt – so-called “eurobonds”. Alternatively, Berlin should leave the euro and let the rest of the union form closer ties.

He concedes, however, that Merkel has managed to shape EU institutions according to her vision. “The window of opportunity to bring about radical change in the rules governing the euro has closed,” he admits. In the absence of a grand step towards more integration, the relationship between creditor and debtor countries brought about by the crisis has crystallised. Failure to act decisively will push Europe into deflation and allow the “process of disintegration” to gather momentum.

It is tempting to share this pessimism. After all, in May’s elections to the European Parliament, anti-EU forces are set to make large inroads. Yet the hope pro-Europeans must cherish is that any success from the eurosceptics will force a discussion over the pros and cons of the process of European integration.

This is a debate that federalists, including Soros, can still win. But they must go beyond simply arguing that the politicians (such as Merkel) should have been more ambitious in the management of the crisis. Rather, they must acknowledge that the German chancellor, like any other EU leader, was constrained by her electorate in terms of the steps she could take.

For the past two decades, the federalists have sold their dream of an ever-closer union to the politicians. But, as the recent anti-euro backlash has shown, this is not enough. The case must be made directly to the electorate. Only the Europeans can decide where Europe’s future lies.

Ferdinando Giugliano is the FT’s economics leader writer