Months of squabbling, proposals met with counter proposals, stagnating economies, soaring unemployment, a hyperactive Sarkozy, a populist Merkel, lying Greeks, indignant Spaniards and obstructionist Finns: it sounds like a recipe for an unappetising hotchpotch and most agree that this is exactly what Europe is today.
With the continent’s sovereign debt crisis and its centrepiece, Greece, relentlessly on the bubble, the pundits increasingly concur that the time for “muddling through” is over. We are told that the euro zone has arrived at a crossroads where only two possible outcomes await: full fiscal and increased political union or disintegration into some version of the pre-1999 euro regime.
But what these pundits have in common is an underestimation of the art of and need for muddling through. Given the nature of the European beast, “muddling through” does not just remain a viable option, it is a necessity.
The idea that the dissolution of the euro zone is imminent and/or desirable ignores both the political and economic costs of such a move, which make such a scenario very unlikely. André Sapir, senior fellow at Brussels’ top economic think tank, Brueghel, explains why.
There is an asymmetry between going into the euro and leaving it in terms of the “continuity of contracts,” he says. These contracts refer to those undertaken by millions of individuals like that of someone in France ordering 2 tonnes of rice from Holland, or an Italian buying a plane ticket to Portugal. When the member states of the euro zone entered into a monetary union, laws had to be passed to transform all the contracts made in the region from their original currencies into euros. This was accomplished successfully without a single instance of litigation.
However, when one considers a break up of the euro zone with Greece, for example, exiting, it will not just be about the Greek state and its public debt but all the other countless contracts undertaken by individuals. “The disruption of contracts will be unmanageable,” says Sapir. “No one will be able to supply anything to Greece.”
The argument is quantified by a recent UBS report according to which the consequences of an economically-weak country leaving the euro would need to include the costs of sovereign default, corporate default, collapse of the banking system and collapse of international trade. Currency devaluation would not provide a mitigating solution. The report put the cost of a peripheral country like Greece leaving the euro zone between euro 9,500 and euro 11,500 a person in that country for the first year and between euro 3,000 and euro 4,000 per capita for subsequent years, amounting to almost 50 per cent of GDP in the first year.
On the other hand, were a stronger country such as Germany to leave the euro, the report estimates the cost to be between euro 6,000 and euro 8,000 for every German citizen in the first year and in the range of euro 3,500 to euro 4,500 a person in the following years. That is the equivalent of 20-25 per cent of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over euro 1,000 a person, in a single hit.
And these figures don’t take into account the political costs of allowing the euro zone to unravel. The single currency is the flagship of the European project; the symbol of the achievements of a continent that has emerged from a bloody, war-ravaged past into a union of neighbours with a shared, overarching European identity. The destruction of the euro would be an existential threat to modern Europe and the social unrest it could spark may have catastrophic consequences. In the past, the break up of monetary unions has often led to civil wars or the rise of military dictatorships. Even if such stark outcomes are avoided, dissolution of the euro would be a major blow to Europe’s international prestige and soft power.
The other scenario of a politically- and fiscally-united Europe is equally improbable and given the democratic sentiment in the European Union (EU) today, undesirable. In this situation, we would see genuine fiscal federalism; an open-ended “transfer Europe” of federal taxation and spending, with a European finance minister and uncircumscribed euro bonds. But the events of the last few months have demonstrated the political impossibility of forcing more Europe down the throats of voters who are increasingly disenchanted with the loss of sovereignty the European project entails.
The EU is not the US or China. It is a beast of a different temperament, unable – as demonstrated by the reaction to the euro crisis – to act swiftly and resolutely in its own interests.
Had the German electorate agreed to an unlimited financial backstopping of Athens in early 2010, it’s possible that contagion to other peripheral countries would have been stemmed.
But the EU is, by its very nature, not capable of this kind of action in the absence of a protracted, difficult process of consensus building. Europe is closer to India, in that it is an entity with close civilisational and historical bonds but not a unitary “nation”. Constrained by the workings of coalition politics, both the 27-member EU and India valorise plurality and argumentation over actual outcomes and performance. They often appear unable to articulate a clear vision of their interests with internal factiousness hijacking unified, well-defined agendas. The world’s two most populous democracies have no choice but to skilfully use the art of “muddling through” and make it work for them.
The EU’s much disparaged muddling through is, in fact, slowly nudging Europe towards the second scenario of closer union, but in a manner that takes account of the complexities at hand. The creation of euro zone bailout funds, the ratcheting up of their firepower, the introduction of the “six pack” legislation that sets out new fiscal and budgetary rules for euro zone members may not in themselves be the single, big bazooka that markets appear to be demanding of Europe. But collectively they are beginning to form the outlines of a longer-term answer to the needs of the euro zone without precipitating a politically unpalatable shock to the system.
Calls for Europe to act quickly and decisively are, in fact, either irresponsible or uneducated. An unconditional rescue of Greece last year would not only have been undemocratic but created a moral hazard, whereby a country would be rewarded for rash, deceitful fiscal behaviour, setting a destructive precedent. On the other hand, abandoning Greece to its own fate was obviously not an option. Germany and indeed the euro zone as a whole has had to carefully weigh options and balance the often contradictory demands of national democratic responsibilities with supra-national demands, the short term with the long term.
But although muddling through is a legitimate, arguably the only legitimate, way for the EU to handle the ongoing crisis, there are of course two varieties of this tactic: good, ultimately progressive muddling through and bad, ultimately self-defeating muddling through.
Putting off major decisions can, for example, be useful if the time gained as a result is spent productively. Thus, delaying a Greek default can perhaps be beneficial if the extra time bought is used to recapitalise Europe’s banks.
On the question of which category the EU’s muddling through falls into, the jury is still out. In the meantime, it’s still muddle, muddle, toil and trouble in the euro zone. The skill will lie in preventing the fiscal cauldron from bubbling over, a feat Europe’s much derided leaders might well pull off.
