WILL the European Union make it? The question would have sounded outlandish not long ago. Now even the project’s greatest cheerleaders talk of a continent facing a “Bermuda triangle” of debt, demographic decline and lower growth.
As well as those chronic problems, the EU faces an acute crisis in its economic core, the 16 countries that use the single currency. Markets have lost faith that the euro zone’s economies, weaker or stronger, will one day converge thanks to the discipline of sharing a single currency, which denies uncompetitive stragglers the quick fix of devaluation.
Yet the debate about how to save Europe’s single currency from disintegration is stuck. It is stuck because the euro zone’s dominant powers, France and Germany, agree on the need for greater harmonisation within the euro zone, but disagree about what to harmonise.
Germany thinks the euro must be saved by stricter rules on borrowing, spending and competitiveness, backed by quasi-automatic sanctions for governments that stray. These might include threats to freeze EU funds for poorer regions and EU mega-projects, and even the suspension of a country’s voting rights in EU ministerial councils. It insists that economic co-ordination should involve all 27 members of the EU club, among whom there is a small majority for free-market liberalism and economic rigour; in the inner core alone, Germany fears, a small majority favour French dirigisme.
A “southern” camp headed by France wants something different: “European economic government” within an inner core of euro-zone members. Translated, that means politicians meddling in monetary policy and a system of redistribution from richer to poorer members, via cheaper borrowing for governments through common Eurobonds or outright fiscal transfers. Finally, figures close to the French government have murmured, euro-zone members should agree to some fiscal and social harmonisation: eg, curbing competition in corporate-tax rates or labour costs.
It is too soon to write off the EU. It remains the world’s largest trading block. At its best, the European project is remarkably liberal: built around a single market of 27 rich and poor countries, its internal borders are far more porous to goods, capital and labour than any comparable trading area. It is an ambitious attempt to blunt the sharpest edges of globalisation, and make capitalism benign.
The problem is that the “European social model” has become, too often, a synonym for a very expensive way of doing things. It has also become an end in itself, with some EU leaders calling for Europe to grow purely in order to maintain its social-welfare systems. That is a pretty depressing call to arms: become more dynamic so Europe can still afford old-age pensions and unemployment benefits.
Europe is in desperate need of good ideas and leadership. Too many EU leaders have tried to secure voter consent for bailing out weak links like Greece by murmuring darkly about “Anglo-Saxon” conspiracies to destroy the euro, and presenting bail-out mechanisms as a way to impose the will of the state over “speculators”. Imaginary enemies are a desperate ruse to provide the union with coherence.
The meltdown that wasn’t
Two scenarios can be plausibly sketched out for Europe in the near term: one surprisingly positive, the other more negative. A positive scenario starts with the fact that things could be much worse. Think back 18 months or so, to a grim period marked by violent anti-government protests in Greece, Latvia, Bulgaria and Lithuania. The head of the Spanish confederation of employers’ organisations, CEOE, could be heard suggesting it might be time for the free-market economy to take a “time out”, to allow for government intervention. Politicians in Spain and Britain pressed bailed-out banks to lend first to domestic businesses and consumers. Greek authorities urged local banks to be “prudent” about transferring capital to Balkan subsidiaries.
A senior official later identified an EU summit in December 2008 as the moment of maximum danger for the free-market cause. At a leaders’ dinner Nicolas Sarkozy, France’s president, berated the European Commission for applying EU rules too rigidly. All around him, heads nodded. If a show of hands had been called, the senior figure felt, an “overwhelming majority” of EU leaders would have voted to suspend the union’s internal-market rules.
In France spooked aides to Mr Sarkozy said a “European May 1968” was brewing. Their boss suggested that billions of euros in aid for the French car industry should be linked to keeping production in France. It was, Mr Sarkozy explained, “not justified” for French firms to make cars for French drivers in Slovak factories. Alarmed at signs of growing east-west division, the Polish prime minister, Donald Tusk, declared that the European ship was “rocking”, and “they’re going to start throwing the weaker passengers overboard.”
Mr Sarkozy’s protectionism was mostly virtual, it turned out. French car firms continue to design thrifty little cars at home, while building them in lower-cost Slovenia, Romania or the Czech Republic. And the feared waves of civil unrest never came. From Greece to Spain or Ireland, protests and strikes have—to date—been smaller than expected, and dominated by public-sector workers with unusually safe jobs to protect.
In October 2009 the European Commission intervened after Germany was caught offering aid to sweeten the sale of Opel, a struggling carmaker, to a consortium pledging to keep open all four Opel factories in Germany (at the expense of more efficient plants elsewhere). The sale later fell through. On the one hand, it was worrying that Germany tried. On the other, it was a striking display of the power of the EU single market: the German government was told it could not spend taxpayers’ money to keep jobs in Germany, without offering equal support to Opel factories in Spain, Belgium, Hungary or Britain.
The single currency was always supposed to drive structural reforms, as once-profligate countries were forced by the rules, and their peers, to live within their means. Instead, France and Germany led a rebellion against the disciplines of the “stability and growth pact” on the first occasion it looked about to catch them. That signalled a free-for-all. Less competitive members of the euro zone, notably in the “Club Med” countries, stood idly by as easy credit fuelled debt and asset bubbles, all the while allowing wages to soar. With some mortgage rates turning negative in real terms, it all felt like free money.
But northerners are also guilty of hypocrisy: it was German and French banks that led the way in lending to Greece or Spain. Lenders assumed that euro-zone sovereign debt was all rock-solid. For those pocketing the extra yields on southern bonds, that too felt like free money. In the words of one senior German, the root cause of the sovereign credit crisis in the euro zone was that markets at last “realised that giving credit to Greece is riskier than giving credit to Austria.”
Northern governments also blocked early attempts at peer pressure. EU leaders, it is said, knew Greece was lying about its deficit figures back in 2008. Yet attempts to confront the then Greek prime minister, Costas Karamanlis, a conservative, came to nothing. Mr Karamanlis was shielded by fellow centre-right leaders, including some of those who now shout loudest for budgetary discipline.
Lessons do seem to have been learned. German officials say there is now bitter regret in Berlin that their country helped wreck the original stability and growth pact. But wrecked it was.
Doing the right thing
European governments have nagged each other to carry out structural reforms for years, without great success. As Jean-Claude Juncker, prime minister of Luxembourg, said memorably in 2007: “We all know what to do, but we don’t know how to get re-elected once we have done it.”
Now, with markets shunning some Euro-laggards, doing the right thing is a matter of survival. Long-stuck dossiers are finally moving. On July 1st the European Commission announced plans to ram through an EU-wide patent valid in all 27 countries (a key demand of European business), after years of delays by Spain and Italy over the status given to their languages.
Earlier this year, EU leaders like José Luis Rodríguez Zapatero of Spain said flatly that market pressure on Spanish debt was a conspiracy. “There is an attack under way by speculators against the euro, against tougher financial regulation of the financial system and of the markets,” he claimed. But with market pressures reaching crisis point in May, Mr Zapatero reversed course, announcing civil-service pay cuts and other austerity measures. He unveiled a (modest) plan to ease Spain’s rigid labour laws, which make older workers almost unsackable, leaving young and immigrant workers on temporary contracts to take the pain when Spain’s property-led boom turned to bust. At 40%, youth unemployment in Spain is not just high; it is a moral indictment of an entire system.
At an EU summit in June, Mr Zapatero led calls for the publication of stress tests on European banks, a long-overdue measure being resisted by some in Germany. While still grumbling about unfounded rumours in financial markets (and he has a point), a more realistic Mr Zapatero argued: “There is nothing better than transparency to demonstrate solvency.”
Crucially for those who believe in a happy ending to this crisis, voters seem made of sterner stuff than politicians feared, and can also see the need for structural reforms. Between 2005 and 2030 the working-age population of the European Union will shrink by 20m, and the number of those over 65 will increase by 40m. Thanks to the focus on crumbling public finances, that demographic time-bomb is now a common part of European public debate. Governments in places like Britain or the Netherlands have been able to propose paying pensions at 67 or even 70, without angry protests.
Even in France, where most voters told an opinion poll in June they considered a proposal to increase the retirement age to 62 “unjust”, few dispute the idea that the current state-pension system faces insolvency. The left and right merely disagree about who should pay to fix this. In Greece, the most disruptive strikes have been staged by hardline Communist trade unions, with larger unions showing some restraint. The press, meanwhile, is filled with commentaries about how the country must live within its means, and how much things must change.
Some of Europe’s most stubborn structural problems involve the misallocation of public spending. Governments have spent years padding civil-service payrolls, unveiling benefits like baby bonuses or early-retirement payments just before elections, and shovelling subsidies to politically powerful interest-groups.
Optimists have grounds for hoping that a squeeze on public spending will bring about some structural reforms by default. Desperate for swift cuts, governments have gone for slashing what they control directly, starting with public-sector pay and government running costs (including, in France, the presidential hunt).
The quest for growth is focusing minds on the most stubborn structural problems. In Belgium members of the government admit it is disastrous that just 35% of citizens between 55 and 64 still work (in Sweden, the proportion is twice as high). In Germany senior figures point to the barriers, such as patchy child care, that keep too many women out of the workforce. Fixing this, they suggest, could do more for domestic demand than deficit spending ever would. Even the old debate about whether Europe needs an industrial policy has been rendered less relevant, as governments lack the cash for picking winners.
The shadow of corporatism
Yet all these elements do not have to lead to a happy ending for Europe. Today’s austerity policies are risky, and may well swell jobless lines in the short and medium term. Politicians fear high unemployment, which can cow the toughest governments.
At the human level, complex interests may undermine reform. Take Spain’s lost generation of unemployed youths. Many of them live with their parents, notes a Spanish economist. In broad economic terms their father’s job for life makes papa an insider, damaging the interests of his “outsider” children. But papa also keeps the household afloat: his children have a keen interest in labour laws that keep their parent unsackable.
Public-sector workers, in particular, may look like privileged insiders. But cuts will make many feel like victims. European state workers are often badly paid, having consciously accepted low salaries and tedium in exchange for job security.
Leading officials in Brussels say they have to convince voters that Europe’s model of open borders is in the interests of the ordinary citizen. The EU must craft regulation that is seen as stopping abuses, especially in the financial sector, or “we will see the rise of protectionism and populism,” says a senior Brussels official. Talk of giving Europe a “social economy” from people like Michel Barnier, a Frenchman and EU internal market commissioner, means something like making capitalism cuddlier: Mr Barnier is, for example, very keen on small local businesses.
The dangers are twofold. First, Mr Barnier and his colleagues are under pressure to propose swathes of crowd-pleasing regulation, especially in financial services. Second, cuddly capitalism has a habit of turning into crony capitalism. Europe has shed socialism as a ruling ideology, with even left-wing governments accepting they have to work with markets. Corporatism, an old European menace (think Mussolini), is a much bigger threat.
In Brussels competition regulators face intense lobbying from businessmen, industrialists and many governments demanding that aid and merger rules be eased, to help European champions withstand global competition. Such lobbying exposes a deep dispute about what the modern-day EU is for.
The EU was once a cosy club of western European countries. Now 27-strong, stretching from the Baltic to Cyprus and taking in ten ex-communist countries, the union’s best justification may be as a means of managing globalisation.
For free-market liberals, the enlarged union’s size and diversity is itself an advantage. By taking in eastern countries with lower labour costs and workers who are far more mobile than their western cousins, the EU in effect brought globalisation within its own borders. For economic liberals, that flexibility and dynamism offers Europe’s best chance of survival.
But, for another other camp, involving Europe’s left (and more or less the entire French political class), the point of Europe is to keep globalisation at bay, or at least curb its power. According to this thinking, single nations are too small to maintain high-cost social-welfare models in the face of global competition. But the EU, with its 500m people, is big enough to assert the supremacy of political will over market forces. For such politicians, European diversity is a problem because it undermines the most advanced (meaning expensive) social models. Such competition must be curbed with restrictions on labour migration from eastern Europe, subsidies for rich-country production and lots of harmonisation—including that old dream of the left, a European minimum wage.
Even in a negative scenario, such voices would struggle to win all their arguments: enlargement has given the newcomers a big say, and they are not about to harmonise away all their advantages. In private even French politicians know they need cheaper eastern manufacturing, too. But if growth does not return reasonably soon, the voices against free markets will grow ever louder.
A Franco-German compromise?
What, then, of the policy solutions being proposed by EU leaders? Although France and Germany do not agree on the vital issue of euro-zone governance, it would be wrong to assume they will continue to disagree for ever. Eventually they will have to find a compromise; though, alas, few of their clashing solutions currently make sense.
Germany’s push for strict discipline is essentially for public consumption. In private, senior EU officials admit that talk of sanctions is nonsense. France and Germany will never accept being fined or denied a vote, says one flatly. Fragile democracies in the east would react horribly to losing their voting rights, undermining all the EU’s hard work to make them more democratic. Freezing funding for EU mega-projects is equally unworkable; such projects often cross borders, so punishing one country leaves others to suffer too.
As for the French-led camp pushing for redistribution to save the euro, whether through bail-outs, common Eurobonds or a “fiscal transfer union”, it has an equally fundamental problem: how to square such integration with Europe’s democratic deficit. Redistribution would require a giant leap towards political union. There is no appetite for such a union just now.
How, then, will Europe try to save its single currency? By muddling through, is the best guess. There will be bail-outs that are not called bail-outs, “temporary” rescue funds for weak euro-zone members that prove very hard to cancel, and semi-formal discussions among member governments about their budgetary plans.
Will that be enough? That mostly depends on economic growth, and whether Europe draws the right lessons from this crisis. An open, flexible, competitive EU offers Europeans the best chance of confronting globalisation. But that is not the only EU on offer: a corporatist, cosy, populist union sounds very plausible to Europe’s ageing, anxious voters. Big choices loom.