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Will Vladimir Putin Bolster the Eurozone?

PARIS – Jacek Rostowski, Poland’s finance minister until last November, recently suggested that Russian President Vladimir Putin would not have dared to annex Crimea if he had not observed Europe agonizing over a solution to the euro crisis. Is Rostowski right?

At first sight, such a connection seems far-fetched. Putin’s show of strength involved military force and the implicit threat of a gas embargo, not monetary power (which he does not have). Throughout the conflict over Crimea, the focus has been on Ukraine’s relationship with the European Union, not with the eurozone. Moreover, Ukraine’s recent monetary history has been defined by an exchange-rate peg to the US dollar, not the euro. So how could the euro be relevant to Russia’s annexation of Crimea?

Rostowski’s point is that European countries demonstrated throughout the euro crisis that they had very little appetite for solidarity, even with their partners in the monetary union. How much solidarity would they be willing to display vis-à-vis a non-European Union country? Russia, the reasoning goes, interpreted the EU’s hesitant management of the turmoil as a license to act. And it could go further for the same reason.

Clearly, the series of events following the financial meltdown in 2008 can be viewed as a crisis of solidarity. When a common response to Europe’s banking debacle was needed, the answer was that each country should take care of its own financial institutions. When Greece lost access to financial markets, several months were needed to engineer a response, which took great care not to rely on EU funds and to limit each country’s financial commitment. Indeed, when a “firewall” was finally created, its size was strictly limited and no form of joint liability was permitted. And Eurobonds were quickly rejected, because they would have created open-ended mutualized-debt obligations.

Similarly, though it had been envisaged that the European Stability Mechanism could be used to recapitalize banks, it was eventually decided that the ESM would lend only to governments, rather than assuming bank risk directly. And, most recently, negotiations to establish an EU banking union once again confronted the challenge of forging a common resolution mechanism while limiting each member state’s commitment.

In short, each time the question of European solidarity was raised, the answer was: “Yes, but only if absolutely necessary, and only to the minimum possible extent.”

Russian reactions to the Ukrainian uprising, meanwhile, have shown how vivid the memory of World War II remains in Moscow. It is fair to assume that the Kremlin may have noticed that Europe had no wish to emulate the United States and engineer a Marshall Plan of its own. More generally, Putin may have concluded that an EU that is so reluctant to take risks for the good of its own members would certainly not take risks for a mere neighbor.

A key dimension of the current standoff over Ukraine is energy, and it raises the same question about European solidarity. As a recent study by Bruegel has shown, the EU as a whole could, with some effort, dispense with gas imports from Russia. But doing so would require EU member states to regard security of supplies as a matter of common concern, not as an issue that each country must address on its own. For example, in response to an embargo affecting a particular country, other EU members would draw on their reserves, increase their own production, pay more for imports, or cut consumption a bit. But this sense of solidarity has been consistently lacking in the EU’s energy-policy debate.

The underlying question is whether it is right to assume that the euro should have created more solidarity. Those who first imagined the single currency expected it to have profound consequences. In their eyes, it would be a means to forge a community. Currency borders generally coincide with political borders, so the creation of a monetary union was expected to give rise to some sort of common polity. Sharing a currency was expected to create a sense of common destiny, and hence solidarity, among the participants.

That did not happen. Even before the crisis, it was clear that citizens and governments alike regarded (wrongly) the euro as a mere practicality. Its introduction was viewed as a technocratic affair, to be handled by central bankers and finance ministers, not as the cornerstone of a common European identity. Its creation did not cause the EU budget to increase by a single euro, nor did it lead to deeper political integration. The commitment called for by a common currency was consistently underestimated.

In hindsight, it was a mistake to believe in the euro’s spontaneous community-creating power. Though there clearly is a link between currency areas and political communities (consider the dissolution of the ruble zone at the time of the Soviet Union’s collapse), it is political community that creates the solidarity needed to foster currency linkages, not vice versa.

Rostowski is certainly right: the euro’s weakness has emboldened Putin. In the end, however, the right question may be whether the Crimea crisis will eventually bolster European solidarity – and thus the euro.