LONDON – When Mario Draghi, the president of the European Central Bank, publicly proclaimed that the ECB would do “whatever it takes” to ensure the future stability of the euro, the effect of his remarks was immediate and remarkable. Borrowing costs fell dramatically for the governments of Italy and Spain; stock markets rallied; and the recent decline in the external value of the euro was suddenly checked.
It remains unclear how long-lasting the effects of Draghi’s intervention – or of the public support offered to him by German Chancellor Angela Merkel, French President François Hollande, and Italian premier Mario Monti – will prove to be. What we can say with certainty is that Draghi’s remarks and the reaction they evoked demonstrate that the fundamental problems of the eurozone are not primarily financial or economic; they are political, psychological, and institutional.
International observers took such notice of Draghi’s commitment to do “whatever it takes” to save the euro because so many of them have come to doubt other leading European players’ commitment to do likewise. (Some of these doubts are, of course, politically or financially self-serving; a certain model of financial capitalism perceives the euro as a threat, and its adherents will do everything they can to bring about its demise.)
But eurozone leaders’ inability to assuage doubt about their commitment to the euro after two and a half years of crisis suggests that the problem is deeply rooted. In their own defense, eurozone ministers point to the raft of reforms that they have introduced over the past 30 months, which will promote economic modernization, the restoration of sound government finances, and closer economic coordination.
Unfortunately, these reforms have all too often served as displacement activity – worthwhile in themselves, but failing to answer unambiguously the question posed with increasing urgency by international markets: Are the eurozone’s largest and currently most prosperous members absolutely committed to its continuation?
No one doubts that Germany and most other eurozone members would prefer the single currency to continue. Today’s uncertainty concerns whether this preference may be overridden by pressing considerations of national politics, or resentment at the slow pace of reform in certain eurozone countries.
Indeed, a German proverb to the effect that “trust is good, but control is better” has been the basis of eurozone leaders’ policy since the developed world’s debt crisis engulfed the single currency’s system of governance. The implication is clear: trust between the members of the eurozone cannot be taken for granted, but must be earned and maintained.
The limitations of this approach have now been revealed. While the eurozone’s richer countries have indeed done much to help their troubled neighbors, they have done so in an obtrusively conditional, transitional, and incremental fashion.
At one level, it is entirely understandable that Germany and other eurozone countries should demand assurances that their resources will not be wasted. But this constant need for reassurance, for the limiting of risk and involvement to the minimum necessary, provokes a fear that at some point Germany and others will judge their partners’ assurances insufficient and the risks run in helping them intolerable. If that happens, the euro’s demise cannot be far behind.
The Treaty of Rome, signed in 1957, represented a noble and ambitious departure in European history. Solidarity and predictability in international relations, based on common institutions and common interests, would ensure Europe’s prosperity and stability much more effectively than had the traditional balancing act of high-wire diplomacy, whose practitioners had too often crashed to the ground.
The euro was founded in this spirit of solidarity, and its contribution to limiting economic and financial instability in Europe over the past five years should not be underestimated. The example of the 1930’s is a reminder of how much worse things might have been. Eurozone leaders’ temptation to revert to earlier, discredited models of European relationships was bearable for a time, but it has now reached the limit of its tolerability.
My impression is that German public and political opinion is beginning to recognize the economic devastation for Europe and Germany implied by a euro breakup. German politicians bear the important democratic responsibility of reinforcing this realization and advocating the steps needed to avert a catastrophe.
It can be no part of a well-functioning democracy for leaders to hide unwelcome truths from their electorates. It would be a delusion to imagine that the eurozone need only follow its current path to ensure the single currency’s future. If nothing else, that current path unacceptably accentuates the differences between member states in a way that is politically and economically unsustainable in the longer term.
The philosophy of control and reciprocity that until now has characterized the eurozone’s approach to its crisis of governance needs to be replaced by one of solidarity and all that follows from it. This means a more balanced economic policy within the eurozone, an enhanced role for the ECB, a real banking and financial union, and a road map to partial and conditional mutualization of legacy debt.
Eurozone leaders have spoken about all of these, but the time has come for unequivocal commitments and a realistic timetable for action. We are now perilously close to the moment when “muddling through” could give way to renewed crisis. So the Bundesbank’s self-righteous zeal in asserting that its responsibilities are somehow graver – and more binding – than those of other central banks is dangerously wrong-headed. “Nein” merely brings calamity closer.
None of Europe’s financial problems would look remotely as challenging today if doubts about the eurozone’s future had been dispelled two years ago, and the reputational and financial costs would have been dramatically less than they have been in the past 30 months. In the long run, solidarity is cheaper for all involved, while its absence could become ruinously expensive in the foreseeable future.