By Ferdi De Ville
Even in these relatively calm days after the second bail-out of Greece has been approved and the European Central Bank avoided the collapse of the European banking system by its second Longer Term Refinancing Operation, it is hard to pick one out of the bran tub of interesting topics to blog about. There is the decision by eurozone finance ministers on Monday 12 March to loosen deficit targets for Spain this year (though not as much as the Spanish Prime Minister Rajoy announced unilaterally earlier this month), which contradicts earlier intransigence in cases as Hungary or Belgium. These ostensible double standards raise the question if maybe it is the composition of the government (coalition) that influences the position of eurozone partners and the Commission against budgetary situations and plans. The negative adjustments to the Dutch and German deficit numbers provide ammunition to the opponents of the hitherto hegemonic narrative of the virtue of thrift and stimulate thought about the possible repercussions of this evolution on the euro crisis policy direction. Other exciting issues are the demands for a growth strategy and a financial transaction tax made by the social democrats and greens in Germany in exchange for their necessary support for the ratification of the ‘Treaty on Stability, Coordination and Governance’ as the new fiscal treaty has eventually been named. And finally, one could write daily about the European dimension of the French presidential elections. If anyone would have been sceptical about the importance of Europe in this rally when I wrote an entry on it a month ago, recent incidents as the alleged conspiracy by conservative European government leaders against Hollande and Sarkozy’s pledge to drastically reform Schengen or pull France out of it should be enough proof. Also of the prediction that whoever wins, this campaign will have a non-trivial impact on the direction Europe will take the following months and years.
But let me take a little bit of distance from these fascinating events that happen every other day within the eurozone, even in a period of relative calm. Now that the wrecked ship has been temporarily fixed, which direction will it sail to reach calmer waters and eventually a safe haven? In more prosaic words, now that we have a pause, how fragile it may be that allows us to think a little about the medium- and longer-term instead of the next trading day, who has a plan, a vision for the euro and Europe and what is it?
It is becoming ever more accepted that the only way for the eurozone to really exit the crisis is through a strategy that combines stability, coordination (though one might question the modalities, these are implied in almost all of the measures taken so far, as the European semester, the six pack and now the latest treaty that is named after these objectives) and fiscal and structural reform (the focus of the Euro Plus pact and Commission recommendations for all the eurozone states and of the conditionality programmes for the countries under an assistance programme) on the one hand with growth and solidarity on the other. The drafters of the Treaty on Stability, Coordination and Governance have been honest enough not to succumb to the temptation to add ‘and growth’ without commensurate arrangements as their predecessors have done with the Stability and Growth Pact or similar to the Orwellian language that can be found in all European Council conclusions of the latest months.
Some have argued that this unavoidability of solidarity has actually been realised by Merkel and her advisers and that they have thought up a plan to move to a real Federal European Union. But that they are advancing towards this Federal Union in a well-considered, prudent sequential way. Before Germany wants to agree to solidarity in the form of mutualisation of debt or a new ‘Marshall Plan for (Southern) Europe’ in the mid-term and to set up a system of automatic stabilizers at the European level in the long-term, it wants to be totally convinced that all eurozone countries have made the (in its current coalition’s view) necessary structural and fiscal reforms. A similar story has been told of the ECB’s strategy. It would be waiting to take up its role as lender of last resort in the secondary bond market until a debt brake has been introduced into constitutions and flexibility-enhancing reforms have been made to national labour markets in all eurozone states so that the eurozone moves into the direction of an optimal currency area.
At least about the ECB this optimistic view might be questionable, taking into account the remarks by its President Draghi on the end of the European Social Model discussed earlier. Assuming that this sequential strategy towards a Federal Union is indeed in the heads of Merkel and some of her allies, a textbook Catch-22 problem looms up. As the peripheral countries are becoming ever more desperate about their counterproductive austerity and reform efforts without the prospect of early solidarity from the rest of the eurozone (in the form of mutualisation of debt, investment in the south, and/or demand stimulus and higher inflation in the surplus countries), the public support for this policy is waning dramatically. I think the Greek elections might be a quick validation of this. The prospect of growth and solidarity might help them in seeing the light at the end of the reform tunnel. This prospect might be necessary to keep the legitimacy and ownership of the reform programmes. But the political leaders in the northern countries seem to remain afraid that any promise of solidarity will impede rather than give an impetus to the reform process. And they have rhetorically entrapped themselves in this moral hazard perspective.
What might free the eurozone from this paradox? The simple answer seems to be: political leadership and courage in the north to explain that only real solidarity (not the rescue of the own banks dressed up as rescue packages for southern countries) can save the euro and put Europe back on a growth path. This political courage, or at least change of discourse, might be imposed on leaders in the north through worsening economic circumstances in their own countries that make the necessity for a balanced fiscal stimulus programme across Europe apparent also to their own electorate. Or it might come through changes of governments, as some political parties are ideologically more in favour of solidarity than others.
Ferdi De Ville is assistant professor at the Centre for EU Studies, Department of Political Science, Ghent University where he teaches and writes on economic and monetary union and the euro crisis.