Preparing for the Green Exit

PARIS – Underpinning European integration is the belief that unity between nations should bring shared prosperity instead of social, political, and economic turmoil. But today’s debt crisis has exposed a fundamental weakness in the eurozone’s architecture: insufficient integration.

This adds another layer of complexity, compared to the United States or Japan, to the economic challenges that the European Union faces. To paraphrase Leo Tolstoy, the European family is unhappy in its own way.

The European Monetary Union acted as a powerful catalyst for European integration, rapidly bringing together 17 diverse economies in a single monetary union – but without fiscal solidarity, a way to enforce fiscal discipline, or an established lender of last resort. This facilitated massive capital inflows and unsustainable borrowing in the peripheral countries – most notably Greece, but also Portugal, Spain, and Italy – shrouding, and thereby accelerating, their increasing loss of competitiveness. When the global financial crisis hit, the house of cards collapsed.

Now, troubled countries do not have the option of reducing their debt burdens and increasing external competitiveness by devaluing their currencies. Integration is thus incomplete, with eurozone countries having abrogated monetary sovereignty, while rejecting the stabilizing mechanisms of shared fiscal and economic policy.