Tipping towards eurozone fragmentation

Published in Business Spectator (Melbourne), 8 November 2012

A latent state of emergency has become Europe’s new normal. Even professional optimists such as German Chancellor Angela Merkel believe that the euro crisis will be with the continent for at least another five years.

In fact, Europe’s problems are unlikely to disappear anytime soon and may well last for decades. The Greek economy is shrinking for the fifth year in a row; France increasingly looks like the eurozone’s next nasty surprise; and tiny Cyprus is on the verge of bankruptcy.

Amid all these economic disasters, it is easy to forget that Europe is not just experiencing financial and fiscal difficulties. It is facing a political watershed as well. After more than half a century of marching towards economic and political integration, the process of “ever closer union” may soon go into reverse. What happens then is anyone’s guess. The EU does not have a blueprint for loosening ties between its member states, but it desperately needs one.

From the signing of the Treaty of Rome, which established the European Economic Community in 1957, until the present day, European politics has been a one-way street. New countries have joined the club every few years. Currently there are 27 EU members. After the scheduled accession of Croatia in July 2013 there will be 28. Serbia and Montenegro hope that they may be the next countries to be allowed in.

Not only did the European Union get wider; it also got deeper as various political arenas became sucked into the EU machinery. Monetary union is only the most visible sign of Europe’s deepening integration: virtually every other area of politics is now at least coordinated across borders, if not “harmonised” (which is not the same as “harmonious”). In today’s Europe, nation states exist in names only as power has shifted to a supranational tier of government in Brussels.

Both the widening and the deepening of political integration have been politically difficult and economically challenging. But for all that, the EU has moved in one direction – it has never had to undo any previously achieved integration.

The reason for Europe’s integration one-way street was the attractiveness of the European project. As long as Europe’s economy developed, as long as the EU mainly meant a growing common market for national champions coupled with the occasional subsidy thought to be paid by one’s neighbours, it made sense to join and play by its rules. The model worked well under fair weather conditions. In other words, “ever closer union” required “ever growing prosperity”.

As the EU can no longer keep this implicit promise, disillusion has set in. This can be observed across the continent, and in very different countries.

The United Kingdom has always been the most eurosceptical member of the EU. Membership of the EU, or the “EUSSR” as it is disparagingly referred to, has always been controversial in Britain. For a country still suffering the phantom limb pain of its lost empire, being on the same level as former Continental arch rivals was obviously an unbearable imposition. Losing its imperial scale in exchange for metric units of measurement was a case in point.

For those Brits who never felt comfortable being part of Europe, the euro crisis provides the perfect opportunity to question their ongoing EU membership. Last month, UK Home Secretary Theresa May declared that the UK would opt out of a raft of EU police and justice measures. Last week the Cameron government suffered a humiliating defeat in the Commons over the EU budget, brought about by its own eurosceptical rebels (with the help of an opportunistic opposition). It is not difficult to imagine a referendum in the near future on Britain’s continued EU membership. And a win of the ‘No’ camp doesn’t require much imagination, either.

Inside the eurozone, too, there are signs of potential U-turns on the one-way road of integration. Of course, this might first happen in Greece if the Greeks realise their country has no chance of economic recovery within the corset of monetary union. But it could equally happen in one of the healthier eurozone countries. Not necessarily in Germany – the Germans would probably be too risk-averse to subject the eurozone to their own departure. But smaller members of the eurozone may well question why they should continue subsidising the others – or whether they would not be better off out.

The prime candidate for such an exit is Finland. The Finns have been sending out signals over the past few years that they are unhappy about paying for the euro periphery. Little wonder: seen from Helsinki, Athens and Lisbon are faraway, strange places. On the edge of the Polar circle, it must be difficult to feel natural solidarity towards the Mediterranean.

So when Greece needed one of its bailouts, it was the Finnish government that first demanded collateral to protect its taxpayers. And it is the Finnish government now that has already made its intention clear not to participate in any future bailout for Spain’s banks. This may be more than an empty threat. The Financial Times recently reported on Finnish proposals to introduce a new parallel currency, which would eventually enable them to leave the eurozone altogether.

Whether it is Britain, Finland, Greece or indeed any other member country turning its back on the EU, the implications of such a move are impossible to predict. It would set a precedent. No longer would the EU mantra of greater integration be the answer to every political and economic question in Europe.

Should any departing countries turn out to be more successful outside the EU it would only be rational for the remaining members to consider their own position. If Finland could avoid paying for Spain by leaving monetary union, why should countries such as Austria and the Netherlands stay? If Britain managed to revive its economy by ridding itself of the EU’s stifling bureaucracy, why would Ireland prefer to remain in the EU?

The EU has reached a state where the benefits of its common market are outweighed by the political and economic costs of integration. Instead of realising this, it remains committed to its over-ambitious integration agenda – promoting some countries to reconsider continued membership of the club.

No doubt Europe is in economic crisis. But it is an economic crisis that sooner or later will lead to a political crisis. The EU does not know how to make integration work. It certainly has no idea how to deal with disintegration.

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