Confounding fears that the European project was moribund, the European Union came through last weekend with a massive bailout fund for Greece, and possibly other heavily indebted EU members. But although the Europeans were able to agree on the bailout, the road forward will not be easy. Europe now has to do three things. First, it must improve the economic governance of the euro area. Second, it must figure out how to grow its economy faster. Third, it must move toward greater political integration among its members.
Let's take these points in order. Despite all the progress made in integrating Europe’s national economies, European economic governance remains firmly national. While the European Union provides broad policy outlines, implementation remains the task of the member states and their national legislatures. Furthermore, a kind of good cop/bad cop game has evolved, wherein the national governments are responsible for the things people like (such as healthcare, education and unemployment insurance), while EU directives often require unpopular measures, like privatization and the introduction of competition in formerly protected spheres. National leaders have little incentive to change the situation, since they remain in charge of the meaty part of political life, and they can always blame “Europe” for whatever is unpopular. Europe’s current budget rules probably insure that this will never change, because the EU budget is limited to 1 percent of the EU’s GDP. This guarantees that the individual states remain in charge of the lion’s share of money—and hence power.
The countries that use the euro—which represent a subgroup of the EU—are subject to rules that limit government deficits and debt. But, paradoxically, these rules might very well weaken rather than strengthen economic governance by putting countries in a fiscal straitjacket designed to achieve low, or no, inflation, at the cost of growth and full employment.
This leads to the second point: European economies need to grow more, both to solve the underlying problem of high deficits and debt and as a matter of social justice. Unfortunately, the EU has focused much more on maintaining fiscal and monetary orthodoxy than it has on creating broadly shared prosperity through growth. When French President Nicolas Sarkozy and German Chancellor Angela Merkel released a joint letter before the bailout agreement detailing their solutions to the current crisis, it spoke volumes that they never said anything about economic growth. They focused exclusively on calming financial markets and complaining (perhaps justifiably) about rating agencies and speculators. But this omission was not surprising, given that the European Central Bank—unlike the US Federal Reserve—has low inflation, not growth, as its explicit and exclusive mandate.
This exclusive focus on price stability is due in large part to Germany’s well-known fear of inflation, which is rooted, we are always told, in the historical trauma of the hyperinflation of the 1920s and the currency reform that created the German mark in 1948. But more important than historical memory is Germany’s underlying economic strategy over the past decade or so, which has been to decrease its own consumption, hold down wages in the name of competitiveness and then export like crazy. This strategy has been wildly successful: Germany’s unit-labor costs have been pushed down, domestic consumption has long been the weakest component of what little economic growth Germany has produced, and the country has built up a big trade surplus—exporting more manufactured goods than any country in the world, including China and the United States, every year from 2003 to 2008.
But one country’s trade surplus is another country’s deficit, and Germany’s export-oriented strategy helped cause the current debt troubles in Southern Europe. Three-quarters of Germany’s exports stay within Europe, and Germany’s banks generously financed the purchase of those exports by less competitive countries like Greece. This whole game is seen by Germans as one of the prime reasons for establishing the single currency in the first place. After all, bringing historically unstable countries on Europe’s periphery into a currency union based on the ultra-stable German mark created reliable export markets for German companies. In part of the German government’s campaign to sell the Greek bailout to its own citizens, Merkel made sure to highlight this benefit in an interview she gave last week to the largest German tabloid, Bild.
Now that the Greeks will have to pay the tab for Germany’s export prowess with a deep recession (due to cuts required by the bailout plan), the economic crisis will very likely become political. This leads to the third point, which is that Europe must do more to create political union if it is to have any hope of maintaining its economic union. European countries have achieved a very high degree of economic interdependence, but there is not a vibrant political space at the European level in which citizens can come together to make democratically legitimated decisions about how their economies should be organized, such as what the levels of taxes, spending and redistribution of resources among countries should be. One possible such space would be the European Parliament, which sits in Strasbourg, but few people pay attention to what the Parliament does; even fewer actually vote in elections for its members. The Lisbon Treaty—in force since 2009 and designed to replace the stalled attempt to create a European Constitution—reinforced the powers of the Parliament and provided for a longer-term President of the European Council, which could theoretically create an opening for a charismatic leader around whom Europeans of different nationalities could rally. But the current holder of this post, Belgian politician Herman Van Rompuy, has been virtually absent from the scene during the entire Greek crisis.
There are two reasons Europe might not achieve closer political union. First, the member states might jealously guard their own powers and be supported in doing so by their own voters, who might not be willing to take a leap into the unknown. This reluctance on the part of Europe’s citizens is certainly reinforced by the continent’s cultural and linguistic diversity. There might simply not be any agreement possible among the 450 million people from Portugal to Finland about what exactly constitutes social justice, how much tax people should pay, or any of the other myriad decisions that must be made in order to consolidate a political community. As the French sociologist and expert on Europe’s diverse social welfare systems Jean-Claude Barbier has pointed out, greater political integration will require years of education as Europe’s citizens learn each other’s languages and develop a political dialogue that can rival in richness the one that exists at the national level now.
The second reason Europe might not integrate politically is that Europe’s elites don’t necessarily want it to do so. Political integration would mean greater influence of popular politics on European decision-making, and that would probably spell doom for the carefully constructed rules of fiscal and monetary orthodoxy that have become the hallmark of the European project. Political integration would mean that European elites would have to listen more carefully to citizens across the continent who are unhappy about high levels of unemployment, cuts in popular welfare state programs and the privatization of large swaths of Europe’s economy. The EU’s policies exert a tremendous influence in all these areas, but Europeans cannot currently vote directly for or against them—or for or against the bureaucrats and European Commissioners who develop such policies.
This situation works very well for Europe’s governing class. For them, the European project is at least partially about creating a polity in which the wise make careful decisions at one remove from popular passions. The president of a leading center-left Paris think tank summed up this technocratic attitude in a recent article on European democracy, when he compared the people to the Sirens of Greek myth, whose song caused sailors to crash their ships on the rocks. As in Homer’s Odyssey, he wrote, political leaders have to stuff their ears with wax so they don’t hear the voice of the people complaining when things get tough. Full speed ahead, no matter how much it hurts!
Building a more integrated and more democratic EU will be tough, given the prevalence of this attitude among elites. But observers have tended to underestimate Europe’s ability to move forward at every stage of integration over the past sixty years. In the mid-1990s, we were told constantly that Europe would never succeed in establishing the euro; today it’s in everyone’s wallet. In spite of the difficulties ahead, Europe might confound the skeptics again.