Sunday, November 23, 2014

Europe’s Deepening Muddle

PRINCETON – German Finance Minister Wolfgang Schäuble recently declared that the European Union has “moved sovereignty to the European level” – a startling claim, given that European governments seem to be pursuing their national interests more aggressively than at any time since World War II. Was Schäuble’s statement supposed to serve as a rallying cry for greater European solidarity? Or was it just a ploy to deflect calls for a larger German contribution to the eurozone’s recovery?

Schäuble is at the forefront of Germany’s efforts to lead Europe without having to pay its bills. To this end, he has called for EU treaty changes to establish a European “budget commissioner” with authority to spend shared European funds and reject member countries’ fiscal strategies when they do not comply with established rules. According to Schäuble, negotiations for such reforms should begin immediately after the European Parliament election in May.

While Schäuble’s strategy may sound appealing, it is, at best, the symbolic garb of progress. For starters, the common funds are meager, with no prospect of being increased – not least because of Germany’s unrelenting opposition. Likewise, so long as member countries maintain fiscal sovereignty, a new mechanism to facilitate finger-wagging at countries that defy European budget rules will change nothing. Over the last two decades, every effort to discipline the EU’s fiscal delinquents has failed, owing to the lack of enforcement authority.

Of course, when a country has run out of options, it will play along to gain access to official bailout funds. But, as Greece’s experience has demonstrated, this does not always work out as planned. Indeed, the Greek bailout – jointly funded by the EU and the International Monetary Fund – began disastrously as it delayed a much-needed debt-restructuring and demanded strict austerity. As a result, the influence of extremist political forces has grown, and a public-health tragedy is brewing. Yet Schäuble, in a seemingly interminable quest for more austerity, views Greece as a model for an even more hapless Ukraine.

Europe is in a muddle. With debt restructuring essentially ruled out and without a sizeable, politically-sanctioned central budget to relieve countries in distress, Europeans have anointed Germany as their presumptive hegemon. Germany relishes that role, but is not able to play the part.

Simply put, Germany is unwilling to spend its taxpayers’ euros to bolster Europe. The robust German economy is little more than a memory at this point. Annual GDP grew by more than 3% in 2010 and 2011, because a still-booming Chinese economy was sustaining high demand for German machines and cars; but, as China’s GDP growth has slowed, so has Germany’s, to an annual rate of less than 1%. This is likely to improve slightly, but Germany’s aging population means that its economy faces low potential growth in the long term.

With Germany lacking the economic dynamism to support Europe financially, its leaders have been unwilling to take political risks. The country’s two major political parties – the Christian Democrats and the Social Democrats – sidestepped a public dialogue on Europe in the September 2013 election that produced their governing coalition.

More revealing is Schäuble’s defense of the European Central Bank’s “outright monetary transactions” scheme (which would permit the ECB to purchase unlimited amounts of weaker eurozone countries’ government bonds). Even as Germany’s Bundesbank fiercely (and rightly) opposed the OMT program for its focus on countries’ solvency, rather than liquidity risk – thus creating a backdoor fiscal union – the government was relieved that the German Constitutional Court, assessing the scheme’s legality, ultimately passed the buck to the European Court of Justice. After all, establishing a genuine fiscal union would require strong political commitment – and considerable legwork.

The EU is an inspiring political structure that seeks to break the mold of the nineteenth-century nation-state. But progress toward that idealistic vision cannot continue to depend on shopworn symbolism. The euro was the most audacious of those symbols – a construct of dubious economic value, with well-documented fragilities. Its adoption was an act of economic hubris that has imposed costs well beyond Europe’s borders.

Today, European leaders are indulging in triumphalism, viewing the current economic reprieve as a validation of failed transnational governance structures. But the depth and persistence of the ongoing crisis have exposed the euro’s fundamental fragilities, and should serve as a warning that today’s technocratic Band-Aids may not hold in the face of another shock.

Unfortunately, bold action to address these fragilities seems more distant than ever. Relinquishing some control over national budgets to achieve fiscal integration appears politically impossible, and talk of treaty changes – even if it comes from the German finance minister – amounts to little more than empty rhetorical finery.

Adopting the euro was a mistake. But the damage is done, and precipitously abandoning the common currency would only make a bad situation worse. With countries unwilling to cede sovereignty, Europe’s only option is to dump the pretense of centralized coordination, leaving countries and banks to deal with – and be disciplined by – their creditors. A step back to this more stable arrangement may offer the only way forward.

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    1. CommentedVal Samonis

      ONLY a loose and always changing association of partially integrated "fatherlands" will work on the Europe-wide scale. The sooner we learn this, the better for Europe and the world. The alternative are the "Dirty Thirties" and the "Bloody Forties"!

      Tertium nondatur.

      Val Samonis
      Vilnius U

    2. CommentedZsolt Hermann

      We are in a paralysis.
      It is all talk but no action, because there is not much action is left.
      We can see it everywhere from the financial problems in Europe to the Ukrainian stand-off, from the failed Israeli-Palestinian talks, Syrian efforts through the hopeless Iranian nuclear talks to the growing tension in the Far East.
      Although everybody tries to wriggle or escape as hard as they can we are all like a school of fish caught in the same net, and every move, wriggle just makes our interconnections and interdependency even stronger and more impossible to break.
      Whether we want it or not we will have to acknowledge, understand what it means we exist in a global, integral system, and then after swallowing this hard pill we will have to learn in practice how to live accordingly.
      The time of heroic dreams, illusions of complete freedom and independence is over.
      We are all totally dependent on each other and we are all totally responsible for each other.
      In Europe and everywhere else only by full integration, and cooperating in a mutually complementing manner can we escape the crisis and build a predictable and sustainable future.
      It is a difficult task since we have to do all this above, against our inherently self-centred and egoistic nature, above natural and historical differences and hatred.
      And as a result we need a very special, practical method, a completely new, integral education program, both in theory and practice, guiding us to change our own nature willingly, with positive motivation.

        CommentedJoshua Soffer

        Your approach doesn't sound very postmodern. It assumes the ability of the individual to assimilate into one global whole without appreciating that each individual assimilates and interprets meanings according to historically shaped personal frameworks of understanding. This is what leads to the existence of myriad subcultures within a larger culture. It is neither possible nor desirable for all to be on the same page in terms of inter-subjective communication. We can, however, strive to anticipate and respect the differences in approach to political and cultural matters within and across national boundaries. It is not the elimination of difference but the multiplication of differences that will protect us from authoritarianism, hypernationalism and conflict.

        CommentedEdward Ponderer

        Indeed, what good is even "thinking out of the box," unless it take one to a larger box. There is only one large box. -- All of was, as one collective, collaborating, mutually responsible network. Individual brain cells will never make it beyond their little micro-world environment, neither will we be able to handle the multitude of global problems coming at us.

        Will we join together to become the captain of our destiny, or shall we continue to let the trade wind of chaos continue to determine our course.

        The sea grows stormier...