BEIJING – With the likelihood of a contagious sovereign-debt implosion and European bank failures greatly reduced by the Greek debt deal and the European Central Bank’s lending program, it is time to look ahead. Where do the European Union, the eurozone, and the EU’s highly indebted countries go from here? Will Europe be able to roll back its welfare states’ biggest excesses without economic distress and social unrest toppling governments and, in the peripheral countries, undermining already-tenuous agreements with creditors?
Some good news globally will have an impact on how these questions are resolved. The United States’ economy is gradually reviving, albeit slowly by the standards of recovery from a deep recession. China, Brazil, and India have not decoupled from their customers in Europe and North America, and so are slowing, though a relatively soft landing is likely if Europe’s recession is as short and mild as predicted.
The EU’s economic output and population are larger than that of the US, so the fate of the 27 EU countries is everyone’s business, from New York to New Delhi, São Paulo to Shanghai. Formed originally as a free-trade area, the eurozone comprises 17 of the countries. Knitting together 17 disparate economies, cultures, and institutions was a monumental undertaking, fraught with risk.
The Lisbon Treaty emphasizes unanimity in decision-making. With some members inside of the eurozone, and others remaining outside of it, and with disparate economic interests and monetary and fiscal traditions even within the eurozone, agreement is difficult. That sets the stage for three broad scenarios, each with implications for the European and global economy, the financial and banking system, and relations between the member states and EU institutions.