Greece rescue is just a sticking plaster

Greece rescue is just a sticking plaster

Opinion piece (The Guardian)
30 March 2010

For several years it has been evident that any momentum the European Union had for further integration has been dwindling. For instance, despite the entry into force of the Lisbon treaty, the EU shows few signs of developing more united and effective foreign policies. But not until this year's euro crisis did I think the EU could go backwards.

Last week's agreement on a procedure for rescuing Greece (or any other member in trouble) is a sticking plaster that will do very little to heal the underlying wound (as Wolfgang Münchau has explained). Unit labour costs in Greece, Italy, Portugal and Spain have risen by between 20% and 30% against those in Germany since the launch of the euro.

Inside the euro, these countries cannot devalue to restore competitiveness. Their governments should have introduced structural reforms to boost productivity but did not. Current account and budget deficits have ballooned. Even if the southern Europeans enacted all the budget cuts, wage cuts and structural reforms that financial markets, the European Commission and the IMF want to see, they will be stuck in a vicious circle for years to come: the cuts will depress demand (though structural reforms need not do so) and hit growth, making it ever harder to constrain budget deficits.

The solution is for eurozone countries with big current account surpluses – notably Germany – to import more. For the past decade Germany's growth has been export-driven, while its consumption has been stagnant. Christine Lagarde, France's finance minister, recently joined the chorus of those urging Germany to rebalance its economy. But the German government bristles at such criticism. Its response is to a) complain that other countries want its goods to be less attractive and its economy less competitive (which in fact nobody is suggesting); and b) argue that even if it put more money into peoples' pockets, they would save more rather than spend.

More thoughtful figures in the government accept that some rebalancing would be desirable; Germany can no longer count on credit-driven booms in the US, the UK and Spain to fuel its export machine. They argue for structural reforms that would in the long run encourage investment, job creation and consumer spending.

Yet there seems little chance of German policy shifting in the foreseeable future. And unless northern Europe boosts demand, southern Europe will find it very hard to pull itself out of recession. Nobody can be sure what social tensions will arise – and whether one or more countries may ask whether the pain of staying in the euro could be worse than the pain of quitting.

But the eurozone crisis is about much more than the survival of the euro. Here are three negative consequences.

First, the crisis has brought Franco-German relations to their most acrimonious state in 20 years. A constructive relationship between Paris and Berlin is necessary but not sufficient for the smooth functioning of the EU. Angela Merkel and Nicolas Sarkozy have never got on, but the arguments over the euro crisis have exposed fundamental differences in their countries' economic philosophies. The Germans think the way forward is stricter rules on budget deficits, with severe penalties – culminating in expulsion – for countries that over-borrow. Such rules would require a new EU treaty. The French want more "economic government", by which they mean not rules but the heads of government discussing each others' policies and performance, including imbalances within the eurozone and national economies. When the two leading countries in the eurozone differ so fundamentally, eurosceptics cannot be blamed for asking how long the euro will endure.

Second, the rows over the euro reveal not only a Franco-German rift, but also Germany's increasing isolation within the EU. For several years, as I have argued elsewhere, Germany has become increasingly unabashed about pursuing its interests unilaterally. In the past Germany usually thought that what was good for Germany was good for the EU, and vice versa. But as the generation of leaders that remembers the second world war has retired, the country has started – like Britain or France – to assert its national interests more forcefully. Thus Germany has opposed common EU policies on energy and Russia because it fears they would damage its close bilateral economic partnership with Russia. Similarly, in EU discussions on climate-change targets or sanctions against Iran, the interests of German industry have pushed German policy away from the EU's middle ground.

Since the financial crisis struck, Angela Merkel has been very reluctant to sign up to EU-wide initiatives for greater coordination, sometimes seeing them as ploys to get Germany to pay for other countries' problems.

And in the euro crisis, Germany has had few allies. It dragged its feet over the bailout mechanism for Greece and ensured that it can veto use of the mechanism. And now Germany – alone – is asking for a new EU treaty. After the nightmare of getting the Lisbon treaty ratified, most governments think it madness to talk about a new treaty to allow miscreants to be thrown out of the euro.

The Germans know that no treaty can pass without unanimous approval, so why are they asking for the impossible? When one of the EU's most important members feels misunderstood and unfairly criticised on a wide range of issues, the web of mutual solidarity that enables the member states to work together looks fragile.

Third, the EU has been far too introspective in the last 10 years, largely because of a continuous focus on treaty change. Too many leaders have spent too much time and energy thinking about institutions and procedures. The major challenges in the big wide world – climate change, energy security, the rise of China, the problems in Russia, global financial regulation and so on – received too little attention.

Many of us hoped that with the Lisbon treaty out of the way, the EU could focus on global issues. But the eurozone crisis looks as if it will last for years, sewing discord, creating ill-feeling, undermining trust and encouraging introspection. Europe's soft power and standing in the world will suffer.