When the fiscal woes of the so-called PIGS (Portugal, Ireland, Greece and Spain) took centre stage last year, markets wobbled as investors fled. But with the euro, the currency shared by 17 European countries, facing its greatest test yet, it soon became clear that the crisis afflicting the region was not limited to bonds and yields, but pointed to a deeper malaise at the very heart of the European Union.
The EU stood exposed as an entity wracked by the fundamental contradictions thrown up by a system wherein member states cede some sovereignty to Brussels, but not enough to allow the system to take effective, union-wide, action in the event of a real problem.
The spotlight was on the euro zone where the tensions inherent in a monetary union that lacked a matching fiscal or political union were shown to be unsustainable. It became clear that something had to give. One possible direction for the euro zone to take was gradual dissolution, with individual countries either being expelled or choosing to opt out of the euro thereby giving themselves the ability to devalue their currency.
But for the EU, the break-up of the euro zone would be a massive blow, given that the currency is symbolically crucial to the European project. The alternative of course, was greater integration. But this required euro zone member states to give up still more of their sovereignty to a project that is often at odds with the popular wishes of their citizens. Above all it needed political leadership and will, precisely the commodities that appeared in short supply last year.
The engine that has traditionally kept the EU chugging has been a Franco-German one. Germany has long been the paymaster of Europe, identifying its own national interests with those of Europe’s and thereby ridding itself of the stigma of its Nazi past and gaining legitimacy as an actor on the European and world stages. As for France, the European project has allowed it to retain a greater sense of its own importance than its dwindling international political and cultural clout would have otherwise permitted.
But all through last year, German chancellor Angela Merkel, appeared increasingly unwilling to keep Berlin’s wagon hitched to its southern and “profligate” European cousins’ sinking fortunes, while French President Nicolas Sarkozy was at his hyperactive, but directionless best.
Merkel and Sarkozy are the first couple of Europe, but it’s a relationship that lacks marital harmony. Dramatically different in style, temperament and background, the two are known to aggravate each other. But circumstances have thrown them together and the two also realize they must stick together in sickness or in health.
The offspring of their euro-crisis-solution conferring has now been revealed, or rather leaked, in the form of a “competitiveness pact,” whereby Germany has finally affirmed its willingness to financially bolster the euro zone’s flagging fortunes, but at a price. That price is greater economic integration amongst euro zone countries that would in effect recast all the club’s members in Germany’s image.
The ostensible aim of the competitiveness pact, a draft of which was circulated amongst the media during an EU summit in early February, is to reduce the economic imbalances between the euro zone’s diverse nations. To achieve this the Merkel-Sarkozy accord seeks to synchronize public debt limits, corporate tax rates, pension ages and educational qualifications across the 17 countries that use the euro and any other EU members that might want to join.
Moreover, this new economic integration would possibly be given political form as well in the form of separate summits for the leaders of euro zone countries (at present while the finance ministers of euro countries meet separately, heads of state and government only meet at the wider EU-27 level).
In return Germany will agree to a beefed up permanent bailout fund for the euro zone. Finance ministers from the euro countries met in Brussels this week to confirm that the permanent rescue fund established late last year would have its capacity to lend doubled to 500 billion euros, the bulk of this flowing from German coffers. Though the rescue fund currently totals 440 billion euros, only about 250 billion euros are in fact available for lending because of the entity’s requirement for capital buffers.
The details of a new and expanded bailout fund will be made public in late March following a summit meeting first of euro zone leaders and later of the EU in its entirety.
These recent developments have some euro-watchers jubilant. “A spluttering Europe has its mojo back,” proclaimed one columnist for the Financial Times of the Franco-German competitiveness pact.
But in fact, the plan has caused some bitter reactions with a host of euro zone countries up in arms against one or other of its provisions. Given its especially low corporate tax rates, Ireland has objected to the idea of aligning the EU corporate tax base. Belgium and Luxembourg are resisting the idea of ending their system of index-linked wages. The Baltic states have said they should not raise their pension age as fast as west Europeans because their average life expectancy is lower. The objections are scarcely limited to the euro zone. There are fears amongst members of the wider EU-27, particularly the new eastern European countries that the Franco-German proposal will lead to a “two-speed” Europe, with a fully-integrated core from which the non-euro using periphery will become ever more isolated and irrelevant.
It is moreover far from clear whether the so-called competitiveness pact will in fact help make euro zone members more competitive. Many analysts argue that no matter the size of Europe’s bailout package, Greece will probably have to have its debt restructured. For a country like Ireland, having to hike its low corporate tax regime might well lead to outflows of capital and jobs. By harmonizing wage bargaining across Europe, poorer countries will be unable to take advantage of their cheap labour and thus become less competitive, even as high German and French wages and social charges are protected. European President Herman Van Rompuy has been charged with the Byzantine task of conferring with the EU’s members to arrive at an agreement on the matter, the outcome of which will be discussed at a summit in March.
The New Year has seen tensions ease a little in Brussels. Markets are calmer than they have been for the last year, and doomsday scenarios are for the time being in abeyance. But it is difficult to escape the feeling that for the euro, this might just be the lull before the storm.
