Yves here. This post is an understated version of a reading that a well-connected colleague gave me after spending three weeks in Europe: that the Eurozone is headed towards breakup.
By Ashoda Mody, Charles and Marie Robertson Visiting Professor in International Economic Policy at the Woodrow Wilson School, Princeton University. Originally published at Bruegel.
The folklore has been that European integration proceeds by “falling forward.” In a crisis, when Europe stumbles, it gets up to move forward. A setback is met with a new resolve for more robust integration. Anticipation of such progression was central to the construction of the euro area, which arose from conflicting national interests as a manifestly deficient economic structure.
The recent European Parliamentary elections were a crucial test of this thesis. With the widespread damage wrought by the euro now clear to all, the test was whether European politics would coalesce around a shared vision for the greater political integration needed to support the euro. The result was not encouraging: national interests dominated, moving Europe from a financial to a potentially political crisis.
A growing east-west divide, a core-periphery rift, the rise of extremist parties and the adoption of extremist rhetoric and their policy agenda by the mainstream parties are reshaping the concept of Europe.
Eastern Europe is drifting apart. Despite a rough patch during the Great Recession, Eastern European nations—especially those that leveraged the economic and political opportunities—benefitted greatly from joining the European Union in 2004. But in some of the most successful economies, the voters were barely aware of the European elections. Less than a quarter of Polish voters showed up. In the Czech Republic and Slovakia, participation rates were in the teens.
This disconnection of Eastern European voters from the European Commission in Brussels and the Parliament in Strasbourg is mirrored in the disinterest of their leaders in the Frankfurt-based European Central Bank. Marek Belka, the governor of the Polish Central Bank, has reiterated that Poland will not join the euro anytime soon. He has also complained that the so-called “Banking Union” will discriminate against non-Euro members. The Czech Republic has similarly distanced itself from Frankfurt.
On the Eurozone’s economic periphery, the Italian Prime Minister Matteo Renzi’s success in the European elections is viewed as a vote for reform. But a stronger Renzi does not help European integration—instead, a more robust confrontation among eurozone members is likely. The previous batch of Members of Parliament voted along national lines on key economic issues: those from the core favored more national budget discipline while the periphery sought financial relief through such mechanisms as Eurobonds. A vote for Renzi will reinforce his demands for greater fiscal latitude from Europe, which will only deepen distrust.
As these centrifugal forces strengthen, the mainstream parties are playing defense against the extremists. Having reflected on his loss two years ago to President Francois Hollande, the former French President Nicolas Sarkozy has called for a fundamental rethinking of Europe. He wants to draw new lines separating countries into inner and outer circles, repatriate “competencies” from Brussels back to national capitals and dangerously restrict the movement of people across borders.
While Prime Minister David Cameron of the United Kingdom and Chancellor Angela Merkel of Germany have raised concerns about absorbing migrants into their countries, Sarkozy has called for an immediate suspension of the Schengen area, which grants the right of free movement of people across most of Europe. Without the free movement, integration has no meaning—the very essence of what Europe stands for is undercut. And the flawed euro project would be further undermined.
The “falling forward” view promises change at the end of a hazy, muddled-through process. Some had speculated that voters would see through that haze and rally around the prospect that the leader of the winning party in these elections would also be the next president of the European Commission. The voters discounted both the likelihood and the value of that outcome—rightly, it appears, in view of the post-election political jockeying. The European Parliamentary elections remind us that voters primarily care about their pocket books. The emerging fault lines along national interests are an expression of despair. They reflect economic distress for many, the burden of relentless fiscal austerity on the weakest and the divergence of economic prospects across countries. Unable to respond constructively, the politics is beginning to mirror the economics, leaving the voters with few options to create positive momentum. Rather than “falling forward,” the deepening fault lines could crack European solidarity and irretrievably undo the gains so painstakingly achieved.
Wise counsel requires preemptive action to prevent the political muddle from morphing into an unmanageable political crisis. While preserving longer-term European goals, particularly free movement, considered decentralization from Brussels is needed to defuse a collision of national interests. A key step would be to downsize the elaborate and ineffective central fiscal surveillance framework, let countries assume greater responsibility of their fiscal policies and allow markets to deal with the risks of lending to errant sovereigns.