Fraying European Unity

Europe is experiencing its worst major economic and political crisis since World War II, says CFR Europe expert Charles A. Kupchan. While the recent summit lays out "steps that at least for now appear to be calming the markets and pushing Europe in the right direction," says Kupchan, there’s a real question about whether Europe’s publics are ready for further integration. "The jury is still out on whether the member states and their respective populations are prepared to bite the bullet and countenance intrusions on their sovereignty when it comes to core questions of economic and political decision-making," notes Kupchan. Kupchan also says that the United States, beset with its own fiscal and financial problems, can only urge Europe to bold action and is not in any position to come to Europe’s aid.

How bad is Europe’s economic and political situation?

The European Union is still in the midst of its greatest crisis since World War II. The crisis has both economic and political components. The core economic issue is that the eurozone remains beset by financial instability and concern about the solvency of key member states. And that economic fragility intersects with the question of political unity, because the economic crisis is eating away at the social fabric of European unity. The crisis requires a collective response--that is to say, more political integration--if it is to be adequately solved in the long run. And the jury is still out on whether the member states and their respective populations are prepared to bite the bullet and countenance intrusions on their sovereignty when it comes to core questions of economic and political decision-making.

Well, in England, for instance, public opinion polls show (PDF) most people really want out of the European Union. Can that happen?

The UK is an outlier in the sense that the British have always been somewhat skittish about the European project and about getting too close to the continent. Therefore there is now a debate in Britain about the possibility of actually leaving the union. The British already have opted out on a number of issues, including membership in the eurozone. But if the ongoing crisis ultimately leads to a tighter fiscal and political union, Britain would find itself very much outside the European core, [and] marginalized in European politics. That could well precipitate a referendum on membership and the prospect of a potential British departure over the longer run.

How can the Eurozone function with such differences in the economies of countries such as, say, Germany and Greece?

The introduction of the euro is part of a long chain of events that goes back to the late 1940s and early 1950s. [Then, in 1957] the Treaty of Rome set the stage for the single market called then the European Economic Community. Over the course of the 1990s, steps were taken toward monetary union and the introduction of a single currency. Those steps forward were effectively economic integration in the service of political union and geopolitical integration, effectively doing away with the national boundaries that so many times in history caused war.

The push toward monetary integration should have been accompanied by the necessary steps on the political front; we should have seen fiscal integration, banking unions, a European Central Bank that has the same kinds of competencies as the U.S. Federal Reserve. But Europeans weren’t ready to take those kinds of political steps, and they therefore went ahead and launched the euro, despite the fact that they were well aware that the appropriate bodies of oversight were not being introduced at the same time.

The absence of adequate oversight and the differences, largely along regional lines between northern Europe and southern Europe, came to haunt the euro. That’s effectively where we are today, where you have very different kinds of economic systems in the north and in the periphery that has led to rising debt and imbalances, particularly in countries like Greece, Italy, Spain, Portugal, and Ireland.

Are the richer countries in Europe ready to bail out the ones having the big problems?

There has been a debate about this issue from the get-go, and in some ways it goes to the heart of the difficulty that Europe has faced. Germany is the key player. Germany has the resources and the power to take the lead in trying to bail out the weaker member states, but the German electorate, and many members of the German elite, have been reluctant to put the burden on German taxpayers, and so what we saw happen last week at the most recent summit was an effort to begin to address the issue of debt in the southern tier by taking a series of important steps that, at least for now, appear to be calming the markets and pushing Europe in the right direction.

Describe them, please.

The decisions taken at the summit can be divided into three categories. The first, and the initiative with the most immediate impact, was to give the European Central Bank a green light to loan money directly to failing banks. That gives the ECB the ability to recapitalize banks in Spain, which were in bad shape because of bad loans associated with the real estate bubble. Prior to this decision, private debt and sovereign debt were being linked; banks were going down and governments were stepping in to save them, but then those governments themselves were seen as becoming less creditworthy, and their borrowing rates went up. That’s what happened in Ireland, and it was in the process of happening in Spain. So the summit decided to give the ECB more power and to redress the banking crisis without exacerbating the sovereign debt crisis.

The second decision--and this is still a work in progress--is to put in place the beginnings of a banking union, to give the European Central Bank the ability to oversee Europe’s banks and to set standard procedures and rules. This was in many respects the bargain central to the Germans being willing to say: We’re ready to put more resources on the line as long as those resources are attached to greater conditionality and to greater institutional and financial discipline. What we will see by the end of 2012 is flesh on those bones.

Finally, the summit put in motion a process of deliberation that is meant to ask some pressing and profound questions about the longer-term goals of European integration. What might Europe look like a couple of years down the road? Will the president of Europe be directly elected? Will Europe have a bicameral parliament--one for popular elections and one that represents the individual member states? Will there be a fiscal union? That is to say, will there be one body that sets tax policy for the union as a whole? These issues are now on the agenda because the financial crisis has forced them, and in some ways. They are the six-million-dollar questions, not unlike the questions that Americans were asking at the Constitutional Convention in the 1780s. The crisis has forced upon the Europeans big questions about the potential--I wouldn’t say final--but penultimate structures of the Union.

Are the leaders of Europe agreed on the need for closer unity?

In general there is more appetite in Germany for European federalism. There is less appetite for this in France, which is more statist and less keen to countenance infringements on its sovereignty from Brussels. And there is the secondary question of: Are Europe’s publics ready for this? It’s too soon to tell. What is worrying about this extended financial crisis is that we are seeing the growth of a strong anti-EU sentiment among European voters, and that is reflected quite clearly in the results of elections that have taken place over the last couple of years. That doesn’t mean that those attitudes can’t be reversed, but it does mean that the public will reconnect with the European project if the austerity gives way to growth, and only if European leaders, rather than following public opinion, get out in front of the public and attempt to relaunch the European project. The blueprints now under discussion and that are being generated by the European Commission and the European Central Bank are intended to give European elites the narrative, the vision, that they can use to attempt to reanimate European unity among European publics.

Is the United States just a bystander in all this, or is there something the United States can be doing?

The United States has effectively had its hands tied because of its own fiscal and financial difficulties. President Obama made a call early on in the European crisis that it would be inappropriate and politically unpopular to be bailing out European countries when American workers and the American economy are themselves in dire straits.

The United States is encouraging Europe to act. It has been sending high-level emissaries, including Secretary of the Treasury Geithner, and one of his key colleagues, Lael Brainard, to advise the Europeans and encourage them to take bold steps and not baby steps, but the United States has not put its own assets on the line. There’s an important lesson in that story, and that is that America’s main partner in the world is flirting with financial meltdown, and the United States is unable to come to the rescue. That tells us that we are, to some extent, in a brave new world in which the United States is no longer in a position to be the lender of last resort, or the country that always is ready to send out the fire trucks when there is a blaze somewhere.

In other words, there’s no second Marshall Plan.

There’s no second Marshall Plan for Europe; there’s no second or new Marshall Plan for the Middle East. That’s just a reflection of the fact that we’re heading into a world in which the hegemonic position of the United States has taken a hit because of the continuing diffusion of power to new quarters, but also because of the pressing need of the United States to focus on problems here at home.