By Mathieu Labrèche, Contributing Correspondent
Could there be a Federation of Europe?
In 2008, when the global financial meltdown appeared destructively universal, former White House Chief of Staff Rahm Emmanuel boldly stated “You never want a serious crisis to go to waste – and what I mean by that is an opportunity to do things that you didn’t think you could do before.” Looking at Europe’s current economic turmoil – including shocking displays of sovereign debt, troubled banks, rising unemployment, as well as social and political upheaval – Emmanuel’s mantra is likely top-of-mind for several European leaders, most senior EU policymakers, and vast swarms of consultants buzzing around Brussels.
German Chancellor Angela Merkel recently stated “if the euro fails, Europe fails.” Coming from the head of state of Europe’s largest piggy bank, her ominous statement confirms the EU’s resolve to plug the hole caused by the deluge of sovereign debt. However, how far is it willing to go to ensure that the monetary union survives? To make matters worse, history has shown that no common currency system has ever survived in Europe. Similar experiments were made in the nineteenth and twentieth centuries – for example, the Latin Monetary Union, the Scandinavian Monetary Union and the European Monetary System. All have resulted, to varying degree, in failure and collapse. Despite history’s gloomy lessons, the EU project, with a single currency as its élan vital, does not seem deterred or discouraged by the challenging state of affairs. Quite the opposite, some see it as a window of opportunity to usher in a stronger and more unified Europe.
In 2011, the ghost of Robert Schuman returns: One of the founding fathers of the EU project, he will come back to haunt Brussels-based contemporaries and successors. His dream of a “federation of Europe” may become the subject of fiery debates that could slowly break the taboos associated with fiscal federalism.
Growing the bailout fund
Last year, the world watched as two indebted eurozone countries suffered from an epic hangover after binging on all-too-appealing low-interest loans offered by the European Central Bank. Potential foreign lenders began to lose confidence, interest rates and borrowing costs rose, and national prospects were undermined. Once it became overwhelmingly real and undeniable that debt had reached unsustainable levels, both Greece and Ireland called-in a bailout to temporarily quell the crisis. This charted a path of increased economic dependence on Brussels.
This year, the Greco- and Celtic- crises may not remain isolated. An unwelcome light shines on other frayed parts of the eurozone patchwork; Portugal, Spain, Belgium and Italy, to name a few, are all under close scrutiny. So far, these countries have adopted measures to contain national debt and reassure investors and international partners that their problems are not seismic – rather, wholly manageable. In the meantime, politicians and bureaucrats in Brussels and member state capitals are seeking to quash all the babble about the end of the euro.
Eurozone finance ministers and senior officials have decided with broad accord to set up a permanent version of the European Financial Stability Facility – also known as the “bailout fund” – once it expires in 2013. The new European Stability Mechanism (ESM) will be flush with cash to actively intervene in situations where troubled nations of the eurozone need massive boosts of liquidity in order to avoid collapse. While there is a quasi-definitive consensus on the need for the ESM, ministers and officials still need to iron out details at the next summit of EU leaders in March. For now, there is a lot of talk and a fair bit of action surrounding the issue, which means the idea is being taken seriously.
It is crucial to point out that all of this negates the “no bailout” clause found in the Lisbon Treaty, Europe’s watered-down constitution, which was implemented only a year ago. The key document was finally established after ten years of tug o’ war between member states, EU officials and citizens. This included resistance by the French and Dutch governments and a fiercely debated Irish referendum. In effect, the bailout craze virtually erased the second pillar of the common currency system over night – that is, the ability of each member state to look after its own budgetary and borrowing needs. It has been yanked away and replaced with a permanent bailout mechanism, and, quite possibly, new rules regarding fiscal and economic management at the national level; in other words, coming in and dictating what a country needs to do to be fiscally responsible and meet common expectations.
Since the long-awaited Lisbon Treaty has been tinkered with so early, it’s not irrational to think even more radical changes occur.
A time for fundamental reform
The cassandras are saying that the EU will eventually face a sink-or-swim dilemma and officials will need to step boldly in order to ward off the break-up of the single currency. In response, European Commissioner for Economic and Monetary Affairs, Ollie Rehn, predicts the 2010s will be the decade of “fundamental reform,” both at the European and the national level. In the same vein, the president of the European Parliament, Jerzy Buzek, declared that “overcoming history is an imperative [for the EU].”
The current crisis could be beneficial in pushing a new phase in the evolution of the European project by pushing for further integration between countries, and particularly eurozone members. It is possible the crisis will enable EU decision-makers to gradually introduce radical transformations that achieve a revitalized Europe with closer, deeper and stronger economic ties. A move like this could include the creation of a financial union, E(U)-bond issuance and a common debt management entity.
Will Europe provide the guarantee?
Faced with lowered competitiveness at the global level, shrinking confidence in the euro and a spreading wildfire of sovereign debt, the EU could eventually be forced to accelerate the push to an economic government and a full-blown political union in order to better manage the mess. Last month, Jean-Claude Juncker, Prime Minister of Luxembourg and chairman of the Eurogroup of finance ministers, advocated the creation of so-called “E-bonds” issued by a common EU debt agency or a U.S.-like treasury. Mr. Juncker said cheekily: “For a systemic crisis you need a systemic response (…) so I believe that when the day comes, we will come back to the [Eurobond] proposal. I have no doubt at all that we will come back to it.” However, like all things EU, there will be much debate that could lead to a stalemate in discussions given the boldness of the proposed transformations. The process to greater integration will take time and a few devil’s advocates will inevitably emerge.
The majority of German citizens are already irked by the fact that their tax revenues go toward financing another country’s problems.
Germany, the backbone of the European economy, is already uncomfortable with the idea of an economic union and E-bonds because it fears its national economy would be most at risk. If a Europe-backed bond were introduced, German politicians and economists would decry the side effects on the country’s credit rating and future ability to borrow. In addition, Chancellor Merkel will necessarily be concerned about the impact her consent would have on her party’s domestic political standing. The majority of German citizens are already irked by the fact that their tax revenues go toward financing another country’s problems. Other European countries may also resist the idea of an E-bond due to a perceived loss of sovereignty over domestic issuance of securities and a loss of economic flexibility in general.
However, the tectonic plates of policy are beginning to shift. Earlier this month, Josef Ackermann, the influential CEO of Deutsche Bank AG, said: “Now is the time to deepen the EU, above all economic and currency union, (…) we need determined leadership for this new push toward integration.” The idea of an E-bond is also gaining steam because it would show the world that Europe is strong, united and committed to overcoming the crisis. In fact, a lot of people would like that. Even Italian Prime Minister Sylvio Berlusconi said he would buy these bonds because “it’s Europe providing the guarantee.” Certainly, his sentiment would be shared by investors, both inside and outside Europe.
Most importantly, China, too, would like concrete action to contain the eurozone debt crisis. It recently bought a large amount of Portuguese and Spanish bonds and would love to see its investments secured. In the grand scheme of things, China would also support the concept of an E-bond to diversify its holdings of foreign assets, while unloading U.S. treasury securities, which are waning in both popularity and value.
U.S. dollar through the looking glass
Multiple sources forecast that the U.S. dollar will one-day lose its position as the global reserve currency. French President Nicolas Sarkozy made headlines last year when he called for an end to the dollar’s reign as the world’s primary reserve currency. Consequently, the euro would do well by solidifying its standing to ensure that countries such as China, India, Brazil and other emerging economies buy into it. In the end, this could sweeten the deal for Germany to get involved with the idea of economic integration, or some kind of centralization of fiscal oversight and control.
The biggest prize of all is a revitalized euro that could eventually challenge the U.S. dollar as a viable, alternative reserve currency. That lofty goal would add credibility to the EU, which is already the world’s biggest economy, producing the lion’s share of global GDP. According to this imagined scenario, Germany, the darling of the European economy, would have an enhanced standing not only in the economic union per se, but also in the global economy. In practical terms, it would do anything to avoid the crash of the euro because that would ensure its ultimate demise. By reverting back to the Deutschmark, Germany would suffer such a spectacular revaluation compared to the euro that it would totally derail the country’s export-driven growth, which has been the driver in its climb back from the global economic downturn.
Crystal ball revisited
Niall Ferguson, Laurence A. Tisch Professor of History at Harvard University, recently declared in a Bloomberg Television interview that the euro area would eventually disintegrate without some kind of fiscal federalism. He warned that the longer leaders postpone action, the higher the penalty. Perhaps recent calls for bold fiscal and structural measures in all member states are a precursor for big moves. It seems French President Nicolas Sarkozy and German Chancellor Angela Merkel are keen on better harmonising economic policy through so-called “convergence programmes.” The Franco-German proposal could mark the shift toward fiscal unity amongst eurozone countries. “The disappearance of the euro would be so cataclysmic that we can’t even possibly entertain the idea,” Sarkozy said during a media scrum at last month’s World Economic Forum in Davos, Switzerland.
EU leaders have been anticipating a crisis like this for years. The architects of the eurozone knew well that a single currency system with a fragmented fiscal policy, or the absence of a common treasury, would eventually lead to a crisis of this kind (although, perhaps not this quickly).
As Paul Krugman recently pointed out in his New York Times column, the creators initially sidelined the predictable problems they would likely encounter because they were “caught up in the project’s sweep and romance.” They may have marginalized their concerns, but they’ve certainly not forgotten them. What we are seeing now is the gradual shift toward more integration in order to close ranks and truly rescue the euro. In doing so, pushing through the final stages of amalgamation, as it once was and still is intended behind closed doors.
In 2011, beware the ghost of Robert Schuman.