Europe’s institutional house of cards

Published in Business Spectator (Melbourne), 1 May 2014

You may find Russian President Vladimir Putin’s behaviour in the Ukraine crisis objectionable; you may deplore his blatant disregard of international law and condemn his brutal ruthlessness in the pursuit of Russia’s interests. However, one thing Putin’s behaviour is not: irrational.

The past few years have delivered ample demonstrations of Europe’s strategic weaknesses. Even after more than five years, the euro crisis remains fundamentally unsolved. Europe has been divided on important foreign policy issues such as the intervention in Libya or in its relations with Turkey. It is not speaking with one voice on international trade issues such as the planned free trade zone with North America, and it does not have a common policy vis-à-vis China.

Putin has correctly assessed Europe’s divisions and taken them as an open invitation to pursue his aggressive foreign policy against his country’s neighbours. In this way he is showing more clearly than anyone before what Europe’s political, economic and security networks are worth. The construction of Europe is a house of cards. It is made for fair weather circumstances — but is not able to withstand the slightest breeze.

Europe’s policy paralysis has been of a similar nature in the euro crisis. The basic problem is the same as in relation to Ukraine: The interests of European nations are too different to be held together by multilateral treaties and international organisations. When push comes to shove, such institutions are unable to reconcile any conflicts. They only work in a conflict-free environment.

In principle, the euro crisis should have been impossible. European treaty law not only specified that there would not be any joint liabilities for other countries’ debt. It had also explicitly ruled out any financial assistance across borders in times of crisis (the Maastricht Treaty’s ‘no bail-out’ clause). It even aimed to make any potential crisis impossible in the first place by imposing strict conditions on eurozone members’ debt and deficits. And just in case there was any doubt left about the intention to have a clean mechanism for the workings of the euro, the European Central Bank was supposed to enjoy complete independence from political interference in the pursuit of price stability, its sole goal.

As we know now, all of these provisions looked good on paper but failed to function in practice. At the first difficulty, France and Germany were allowed to deviate from the deficit rules without being punished. The ‘no bail-out’ clause did not survive Greece’s first crisis in 2010 and has been ignored several times since with similar assistance packages for other countries. Meanwhile, the ECB’s focus has shifted from just preserving the value of the euro to keeping the currency and Europe’s banking system alive.

It is not just that existing institutions and laws were redefined in the crisis. The crisis itself cannot be solved because of vastly different interests across the continent. David Marsh, author of a number of highly acclaimed books on the euro, has aptly likened Europe’s crisis management to trench warfare. There is no movement in the crisis and no possible solution in sight because national interests are irreconcilable. Greece and Italy have totally different expectations on the euro than, say, Germany and Finland. The most elaborate policy framework of the European Union, its central bank, Parliament, Commission, and Court cannot overcome these divisions. At best, it can moderate them.

Europe’s response to Russia in the Ukraine crisis shows the same pattern. Again, Europe is divided. This time the division is not between the euro core and the periphery but dependent on national political and economic interests. The Baltic States and Poland are obviously concerned for their security and fear that Russia’s annexation of Crimea and its destabilisation of Eastern Ukraine could set a dangerous precedent. For them, it could potentially be a question of ‘To be or not to be’.

Britain has been remarkably cautious in the crisis, perhaps due to the fact that London has become a magnet for Russian capital. In Germany, there is a big public debate between those critical of Putin’s actions and others showing understanding for them. It is telling that while foreign secretary Frank-Walter Steinmeier is busy condemning Russia’s actions, former chancellor (and fellow social democrat) Gerhard Schroeder was this week celebrating his 70th birthday in Saint Petersburg – at the invitation of his old mate Vladimir Putin.

There is no united European position on Russia. The European Union may have a High Representative for Foreign Affairs and Security Policy with Baroness Catherine Ashton. But Lady Ashton does not represent anything or anyone. She is as powerless as the organisation she works for.

Putin knows how ineffective Europe’s political framework is in the face of conflicting national interests. His weapon is not so much Russian gas supplies or his country’s business links to Europe. In fact, Russia is probably more dependent on its European customers than vice versa. But the difference between Russia and Europe is that Russia knows what it wants whereas Europe cannot even agree on the definition of its goals.

For the future of Europe, both in economic and political terms, this does not bode well. Europe has a mountain of problems to solve. It is not just the well-known problems surrounding its poorly designed monetary union or the state of public finances across the continent, which would require cooperation between European neighbours. There is also the challenge of organising Europe’s security at a time of tight budgets and demographic ageing. Europe also lacks an agreement on how to deal with refugees arriving from across the Mediterranean. It would also benefit from a better coordination of its energy policy framework, but again this is an area in which national policies are made independent of each other.

Whether it is the ongoing drama of the euro crisis or the inability to find a response to Russia’s power politics, Europe presents itself disunited and unable to respond to challenges. One might almost feel grateful to Vladimir Putin for pointing out Europe’s institutional wounds. Whether Europe will draw the right conclusions from this is an entirely different matter.

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