WASHINGTON, DC – This is a momentous summer for Europe, because both the eurozone and the European Union could be in danger of unraveling, despite the important steps toward a banking union and direct recapitalization of Spanish banks taken at the June meeting of eurozone leaders. Implementation of the proposed reforms is lagging; there may be legal challenges to the European Stability Mechanism in Germany; and the Netherlands and Finland seem to be backtracking on some parts of the agreement.
Even in a worst-case scenario, some degree of intra-European cooperation will surely survive. But it is hard to see how the EU as we know it could survive even a partial disintegration of the eurozone.
Those who argue that one or more countries on the eurozone’s periphery should take a “holiday” from the euro underestimate both the economic and political repercussions of such a move. The sense of failure, loss of trust, and the damage inflicted on so many if two or three countries had to leave would shake the entire Union.
One of the key challenges is the negative feedback loop between the weaknesses of many banks and the doubts about the peripheral countries’ sovereign debt. The sovereign-debt and banking crises have become even more closely interlinked as banks bought greater amounts of their home countries’ sovereign debt.