Despite European Union leaders agreeing on a €500bn support package, the underlying causes of the euro crisis – southern Europe’s lack of competitiveness and structural imbalances within the eurozone – remain. Greece, Italy, Portugal and Spain face years of low growth, severe budget cuts and perhaps social unrest. Whatever the fate of the euro, the prevarication and long arguments over how to help it have damaged the EU in at least four ways.
First, these disputes have worsened France and Germany’s already fraught relationship, exposing a rift in their economic philosophies. Berlin wants stricter rules on budget deficits, with tough penalties for countries that borrow too much. But Paris stresses that governments need to discuss each other’s policies and performance, as well as imbalances within the eurozone. The two have clashed on whether to involve the International Monetary Fund, whether the European Central Bank should buy government bonds, how speedily the EU should act, and much else.
The difficult personal relationship between President Nicolas Sarkozy of France and Angela Merkel, the German chancellor, matters. The EU can achieve very little if their countries do not work together effectively – especially with the new UK government unlikely to seek a leadership role.
Second, the Greek crisis has highlighted Germany’s growing isolation within the EU. Many Germans used to think what was good for Germany was good for the EU, and vice versa. But the country has started to assert its national interests more forcefully, as Britain and France do. This year, many member states – and the European Commission – have criticised Germany for not doing more to stimulate demand within the eurozone, and for delaying the bail-out of Greece.
German politicians claim that boosting domestic consumption would do little to help southern Europe. They also argue that they are constrained by the public’s hostility to aiding Greece. The obvious response is to ask why those politicians have done so little to explain to the public that since the euro greatly benefits the German economy, the country has a strong interest in paying to keep the eurozone stable.
Germany is not entirely on its own in these arguments; the Dutch, Finns and Austrians have sympathised with Ms Merkel’s hard line on Greece. But many Germans, hurt by criticism that they regard as unfair, no longer want to subordinate their interests to those of “Europe”. Never before in the EU’s history has Germany been so disconnected from most of its partners.
Third, recent events have weakened the Commission, whose power – relative to the EU governments – has been in slow decline for 20 years. When the financial crisis struck in 2008, the larger member states led the EU’s response, partially sidelining Brussels. Though the Commission helped to design this week’s €500bn package, EU governments will control the largest pot of money and the IMF will lead on conditionality.
In Paris, and even more in Berlin, there is growing contempt for the Commission. They accuse it of interfering in too many areas and of failing to lead during the crisis. The Commission responds that policing competition policy upsets big EU members and that they do not want it to lead. The Commission’s job is to promote the wider European interest, so the weaker it becomes, the greater the risk of the single market fragmenting.
Fourth, the crisis will make the EU introspective. For the past 10 years the emphasis on treaty change has forced leaders to spend too much time and energy on institutions and procedures. With the Lisbon treaty out of the way, many hoped the EU would focus fully on global challenges such as Russia, China, energy and climate. But we can now expect several years of emergency summits and bail-outs, sowing discord and undermining trust among member states.
None of this means the euro or the EU will fall to pieces. For all their imperfections, Ms Merkel and Mr Sarkozy are the best leaders Europe has got, and they will find ways of working together. Germany will do what is necessary to keep the euro stable. Governments will grudgingly accept that they need the Commission. And crises elsewhere will force EU leaders to think globally. Yet a tardy and muddled response to the euro crisis has greatly tarnished the EU’s soft power and global standing.
The writer is director of the Centre for European Reform
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