Where Next for a Europe in Crisis? :

The European Union summit of 27 October resulted in an apparent agreement on shoring up Greece's finances. The details of the agreement are, yet to be fleshed out, but even if they are, it looks like a period of great uncertainty and change ahead for the European Union and the euro.

COMMENTARY

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Where Next for a Europe in Crisis? Kirsty Hughes		Greece of huge public spending cuts, privatisation and tax increases is proving disastrous both economically as the economy shrinks faster than the government budget deﬁcit and politically as tens of thousands take to the streets and strikes become a common occurrence.

The European Union summit of 27 October resulted in an apparent agreement on shoring up Greece’s ﬁnances. The details of the agreement are, yet to be ﬂeshed out, but even if they are, it looks like a period of great uncertainty and change ahead for the European Union and the euro.

Kirsty Hughes (hugheskirsty@gmail.com) is a writer based in London.

Economic & Political Weekly

november 12, 2011

s the leaders of the eurozone struggle to contain Europe’s ﬁnancial crisis, big question marks are appearing both over whether the euro will actually survive as a single currency and over whether the euro crisis may split the European Union (EU) politically into two different groups – an inner core around the fragile euro, and an outer core (including the United Kingdom (UK)) losing inﬂuence and voice in the EU but less caught up in the immediate crisis.

The Euro in Crisis

It is almost two years since the solvency of one of the poorer and smaller members of the eurozone, Greece, has been severely challenged by markets. Greece has had to withdraw from markets for government debt and rely on its euro partners and the International Monetary Fund (IMF) to prop it up as it attempts to put its house in order. But the “austerity cure” imposed on

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But the much wider challenge for the EU – or those 17 of its 27 members in the eurozone – has been the contagion effect to other euro countries. Portugal and Ireland are now also dependant on eurozone support as they implement austerity measures. And the markets are making it evermore costly to fund Italian and Spanish debt too. And while it has been a huge p olitical effort, at a time of recession, for eurozone members to agree to bail out the relatively small economies of Greece, I reland and Portugal – leading not least to much bad blood between Germany and Greece – it is Italy and Spain that are the politicians’ real nightmare. Italy and Spain are the third and fourth largest economies in the eurozone, and if markets drive their borrowing costs too high, the risk of a sovereign default by such core e urozone countries could destroy the euro, tip the eurozone into a huge economic crisis, and in the process create a renewed global crisis.

COMMENTARY

Europe’s leaders have held a series of summits desperately trying to solve the Greek problem, stop Greece defaulting, and stop contagion to other countries. Its latest and biggest effort – with the United States and the IMF also putting huge pressure on euro leaders to come up with a solution – was at the end on 27 October.

After a summit that went on till 4 am in the morning, the two key leaders of the eurozone, Germany’s Angela Merkel and France’s Nikolas Sarkozy emerged tired but upbeat to proclaim a three-part deal had been agreed. First, Greece’s private creditors under big political pressure will accept a voluntary 50% reduction in the value of their Greek debt holdings (a so-called “haircut” in the markets’ jargon – crucially if strangely not meant to be called a default). Second, there will be a recapitalisation of Europe's banks to show the markets that even in countries like France, where banks are highly exposed to Greece’s debt, the banks can absorb the losses. And third, a “leveraging” up of the bailout fund the European Financial S tability Facility (EFSF) from its existing size of about ¤400 billion (of which ¤150 billion is already committed to Greece, Portugal and Ireland) to around ¤1.4 trillion through a process of leveraging up the existing amount (including, controversially, encouraging non-European economies such as China to invest in the fund).

Markets went up in the ﬁrst couple of days after the summit – but many details of this deal have yet to be ﬁnalised so no one is making any bets that the immediate crisis is over. And if the markets do stay calm, a big part of the eurozone policies for managing the crisis in the next couple of years is German-style budget stringency, with the summit also calling on eurozone countries to enshrine balanced budgets in their constitutions – a major intrusion into each country's national sovereignty and an economic approach that would have Keynes turning in his grave.

As we go to press, Greece’s prime minister has called a referendum on the deal, leading to counter-calls from the opposition for resignation of the government, all of which appears to put big question marks over the deal and so over the stability not only of Greece but of the entire eurozone.

European Politics at a Turning Point

For now, most attention remains on the markets and the performance of the euro economies. But there are some big political issues here too. And the one that is starting to attract more attention is the question of whether the EU is now effectively fractured into a two-tier, two-speed block, with the 17 countries of the eurozone calling the shots, despite the euro crisis, and with the ten countries in the outer tier (including the UK, Sweden, Denmark and Poland) losing inﬂuence on EU policies and politics. Some are already calling it a parting of the ways between the 17 “ins” and the ten “outs”.

The euro crisis has forced the 17 euro countries into much faster convergence of their national macroeconomic policies than they would have chosen. And so at their 27 October summit, they decided to

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november 12, 2011 vol xlvI no 46

Economic Political Weekly

strengthen their European level political structures to go along with this. The euro 17 heads of state and prime ministers agreed they will now meet at least twice a year, and quite likely more frequently, in a “Euro summit” without the other 10 leaders (just as they did at the October summit). These meetings will be prepared by the 17 euro ﬁnance ministers, and supported by the European Commission. Suddenly, there seems to be two European Unions – one that has summit meetings with 27 heads of state, and one that has parallel summit meetings and that is much more integrated with 17 heads of state.

The Outsiders

Does any of this matter? Well the UK and others left in the outer group think so. D elighted though the eurosceptic British Conservative Party is to be, in their view, proved right that the euro was a disastrous project from the start, Prime Minister David Cameron is enough of a pragmatist to know you cannot wield power and inﬂuence over crucial decisions on EU trade, or the EU single market (which a ccounts for half the UK’s trade) if you are not in the room. And if you want, as he does, to limit what the EU does as a foreign policy actor on the world stage, you need to be a big player and in the room too.

And while in principle any decisions on the single market or trade or foreign policy should still take place in summits of the 27, the UK, Sweden and others fear that the 17 euro “insiders” will caucus and plot and stitch things up in advance.

UK on the Margins

David Cameron is left doing the splits. With extraordinarily inappropriate timing, two days before the crucial euro summit, his eurosceptic backbenchers forced a debate on whether the UK should have a referendum on leaving the EU – they lost but not without Cameron facing half his backbenchers voting against him, embarrassing him in European eyes, and adding to the stresses with his pro-European coalition partners the Liberal Democrats. Cameron says he wants to “repatriate” various EU powers back to the UK – including those that control parts of social and employment policy (and for example limit the length of the working week). But Brussels’ insiders are unimpressed at the contradictory British demands that the UK should on the one hand still have a strong voice at the insiders’ summit table (while refusing to contribute any funds to the Greek and euro bailout funds) and on the other hand that the UK should have special treatment and not have to sign up to all the EU’s rules.

Most of the other 10 “outsiders” apart from Denmark and Sweden are anyway due at some point to join the euro. And while they will not be doing that in a hurry, the UK’s euroscepticism is not shared by the other nine. So the outer 10 are not looking like a new cohesive political grouping; r ather they look like losing inﬂuence and clout in the newly emerging Europe.

Germany in Charge?

And for the 17 on the inside, there is much uncertainty too. Most of all, no one yet knows if the euro crisis is now on the way to a solution. And if it is, will the eurozone start to grow again – including in the hardest-hit countries like Greece, Ireland and Portugal as well as in the northern economic heartlands of Germany and Netherlands? If not, the whole euro project – and so the whole European political venture that the EU represents – could be in doubt.

Meanwhile, many of the 17 are looking askance at the dominant role of France and Germany – but above all Germany – in the decisions coming out of the Euro-summits.

Germany has the largest strongest economy and is paying most for the bailout – so it has dominated the decision-making. But EU countries, including smaller ones, are used to forming coalitions, bargaining, getting their way on some things and not on others.

So how this inner core group of 17 will develop – with what sort of political dynamics – remains for now an open question. If it moves beyond the euro crisis, Germany alone will not determine the EU’s political future and policies from trade and climate change to relationships with west Asia and north Africa or further aﬁeld with China and India. And while the EU has struggled to project a stronger foreign p olicy voice to match its trade and economic weight, it may be that this new block of 17 countries, if it integrates more economically may in the coming years also integrate more politically.

For now, a whole spectrum of outcomes are possible – a break-up of the eurozone, with countries reintroducing their old n ational currencies and political fragmentation alongside, or a stagnant but still i ntegrated eurozone of 17, or a slowly recovering eurozone of 17 with increasing political and economic dynamism. And whichever path the 17 end up on, for the coming period, the 10 “outs” including the UK are going to ﬁnd their voices and inﬂuence increasingly marginalised in E urope. It is a time of great uncertainty but also one of big change.

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