Europe has been shaken by a social and political crisis. A collection of nations striving to create a community has been forced to reevaluate their relationships with each other. Today, Greece, Italy, Ireland, Portugal, and Spain all faced economic insolvency. Despite the establishment of a large bailout fund to heal the Euro crisis, the economic instability of the Eurozone has still raised concerns about the viability of the entire union.
As the strongest country in Europe, Germany has consistently aided other EU nations struggling financially. Nonetheless, recent evidence calls into question the German public’s willingness to pay for bailouts of other European countries, despite general support for European unity. Germany’s situation highlights the difficulty in maintaining an economic union that requires significant sacrifices for the greater good. If it proves unable to reconcile itself to those expenses, however, the future of the Eurozone may remain in doubt.
The Unity of Europe
Since the beginning of the European financial crisis, the core economies of Europe—among them Germany, France, and the Netherlands—have performed relatively well. Yet the zone’s peripheral countries have not shared in their neighbors’ comparative success. Greece, Ireland, Italy, Spain and Portugal all struggle with fragile banking systems, burst budgets, and high levels of government debt. While the gap between the core and peripheral economics of the EU grows, however, the high unemployment, inflation and government debt of peripheral nations largely fails to affect the public in core economies. This divergence creates an imbalance between individual European communities, impairing the unity of the European community as a whole.
As the largest economies of the Eurozone Germany and France have been active in providing various assistance packages and have contributed substantially to a $1.4 trillion bailout fund for the less solvent nations. On Sept. 29, Germany’s Bundestag voted in favor of increasing the European Financial Stability Facility’s available funds to €440 billion, as part of a plan to assist the Greek economy. Dr. Paola Subacchi, the research director for international economics at the U.K. think tank Chatham House, told the HPR, “The crisis is actually a unique opportunity for European nations to sort out their economies and rebuild their institutions with effective reforms.” Critics contend that by locking the nation into an unsustainable monetary structure, the bailout plan would devastate Greece’s economic competitiveness. Nevertheless, Subacchi adds, “Before the Euro, Greece was never a competitive economy.”
Germany’s Responsibility
If the European crisis is the opportunity that Subacchi claims, Germany may be able to use the turmoil to strengthen weaker economies in the Eurozone. Harvard economics professor Martin Feldstein argues that there are two reasons why Germany and France should support other European countries. “First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit that they have extended to Greek and other Eurozone banks. Postponing a default gives the French and German financial institutions time to build up their capital.” The second, Feldstein argues, is “the risk that a Greek default would induce sovereign defaults in other countries and runs on other banking systems, particularly in Spain and Italy.” Indeed, Feldstein points to the recent downgrade of Italy’s credit rating as evidence of remaining dangers.
While Feldstein may hope for the best, however, many Europeans fear the worst. A survey conducted by Cicero magazine indicate that 61 percent of Germans do not expect Chancellor Angela Merkel to win a third term in 2013 elections. A prime reason may be the belief that Merkel puts to interests of Europe above those of Germany. According to a poll released by TV station ARD, only 22 percent had “strong faith” in the way that Merkel handled the financial crisis. As the idea of the European Union grows unpopular, and resistance to governments strengthens, Europe’s leaders may find themselves out of options.
The Fiscal Option
Some experts advocate expanding the current political system in the European Union into a more comprehensive fiscal union. A fiscal union contains all the elements of a monetary union, along a harmonized set of policies across the nations, designed to smooth their economic cycles, and decreasing the risk of market fragmentation. Professor Iain Begg, an international economics expert at the European Institute of the London School of Economics told the HPR that “the creation of a single Europe bond, similar to the U.S. treasury bonds, can go a long way in solving the European crisis.” Begg recognizes that “if all countries were united with a single bond which could be bought very cheaply from other countries such as China and Gulf area, then this would prevent the fragmentation of markets by creating a single European bond market.”
Klaus Welle, the current Secretary-General of the European Parliament told the HPR that he also supported the idea of uniting Europe in the long term. “Although this is a major constitutional issue that needs to be handled carefully, it would create a quantum leap in European integration.” He adds, “In the short term, we need simple mechanisms, like buying government debt under the European Central Bank under very specific conditions. The road to Europe’s escape from the crisis lies in fiscally responsible behavior.”
Dr. Subacchi, on the other hand, considers the idea of a fiscal union unnecessary, “All we need is to harmonize the national markets. We do not need to harmonize the entire fiscal policies and create a fiscal union. Instead, a set of effective tax reforms supervised by the European Union is more necessary for Greece’s current economic climate.” Nevertheless, the lack of support amongst Germans for bailout packages makes the possibility of a fiscal union seem ultimately unlikely.
A New Europe?
Today, according to Welle, the situation in Europe appears a sophisticated form of the prisoner’s dilemma. Each country has to choose between solidarity and responsibility, yet, as Welle points out, “We tried the model of the Congress of Vienna for years, but it didn’t work out.”
The unity of Europe is impaired by the economic crisis, compounded by the fact that the separate national communities that make up Europe are not willing to support each other as forcefully as they have in the past. As Professor Begg puts it, “When Berlin Wall fell, West Germany was willing to pay for East Germany. If European Union falls, it is not so certain that the Germans would pay for the Greeks.”
Alpkaan Celik ’15 is a Staff Writer