Europe's Deadlock

Europe's Deadlock: How the Euro Crisis Could Be Solved — And Why It Won't Happen

Copyright Date: 2013
Published by: Yale University Press
Pages: 144
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  • Book Info
    Europe's Deadlock
    Book Description:

    This short, fiercely argued book explains how five years of continuous crisis management not only have failed to resolve the Eurozone's problems but have actually made things worse. While austerity-wracked nations descend into misery and resentment, creditor countries fear that they will be forced to subsidize their weaker brethren indefinitely. Constructive dialogue has collapsed as European decisionmaking descends into terrified paralysis, and the potential paths out of the impasse are blocked by indecision and incompetence at the top.As voters in Greece and Italy rebel against externally imposed hardship, and the sums needed to bail out failed economies reach ever more staggering proportions, the contradictions at the heart of the European project are becoming more and more obvious. Marsh warns that the current succession of complex technical fixes cannot sustain the Eurozone on life support indefinitely. Radical solutions are on offer, but without leaders who are strong and principled enough to push them through, Europe risks a depressing future of permanent decline.

    eISBN: 978-0-300-20438-4
    Subjects: History, Political Science, Business

Table of Contents

  1. Front Matter
    (pp. i-viii)
  2. Table of Contents
    (pp. ix-x)
  3. Preface
    (pp. xi-xii)
    David Marsh
  4. Introduction
    (pp. 1-3)

    History shows us how periods of unstable equilibrium can last a surprisingly long time. During the First World War, the western front was frozen into the terrain for three-and-a-half years. The Cold War between the Soviet Union and the US lasted forty years. For four centuries, Greece was part of the Ottoman Empire. Consequently, we should cherish no false illusions about a quick end to the euro crisis.

    Europe embarked on the experiment of monetary union in a bid for unity. An associated aim was to render Germany harmless and relatively powerless after German unification and to prevent a return...

  5. 1 Unhappy family
    (pp. 4-12)

    Nearly fifteen years after the birth of the single currency as a landmark project for political and economic integration, Europe has healed some of the worst imbalances built up during its rollercoaster ride into instability. But the correction from earlier economic overheating has been achieved through widespread austerity that has brought with it recession, hardship and disruption, which in turn place a question mark over European nations’ ability to stick together for the rest of the journey. The trans-Atlantic financial crisis of 2007–08 and the worldwide downturn in 2009 exposed fault lines in the euro bloc that had earlier...

  6. 2 Dashed illusions
    (pp. 13-19)

    The European treaty on monetary union was agreed at Maastricht in the Netherlands in December 1991 by twelve government leaders, including Germany’s Helmut Kohl, France’s François Mitterrand, Britain’s John Major (who secured an optout for Britain) and Italy’s Giulio Andreotti. A neat town of antique shops and multilingual universities on the triple border between Germany, the Netherlands and Belgium, Maastricht is an aptly European spot. A still more appropriate venue would have been Vienna, the birthplace of Sigmund Freud, the father of psychoanalysis. Certainly, as Angela Merkel likes to say, the euro is much more than a currency. The motivations...

  7. 3 The German question revisited
    (pp. 20-25)

    The euro’s establishment formed part of decades-old efforts to resolve the ‘German question’. Cutting the newly reunited Germans down to size was an aspiration with which leading Germans readily concurred, because they wished to integrate Germany’s new potency within a genuinely European framework. Helmut Kohl famously said that Germany had no interests of its own, since they were always aligned with those of Europe. He agreed wholeheartedly when François Mitterrand declared that ‘more Germany’ had to be countered by ‘more Europe’. But the awkward role of Europe’s pivotal nation – as historians have stated, too big to fit neatly into...

  8. 4 Winners and losers
    (pp. 26-30)

    The gloomy predictions of the late German-British sociologist Ralf Dahrendorf, who said that the euro would split rather than unite Europe, have become a reality. The gap between creditors and debtors has become unbridgeable. The former are disconcerted or outraged by flows of funds to help hard-up southern Europe, viewing this as unfairly rewarding failing countries and as breaching the celebrated ‘no-bailout’ clause of the Maastricht treaty. The latter are full of resentment about the painful recessions now spreading around the Mediterranean and beyond: they blame the northern creditors for engineering austerity and depression to force southern countries to reduce...

  9. 5 A dangerous vacuum
    (pp. 31-35)

    The euro has turned out to be a currency for which nobody is responsible. Although it is apparently run by an independent European Central Bank, no fully fledged political European entity is really in charge. Instead, management is in the hands of a cacophonous collection of European states attempting to combine as much control as necessary with as many elements of national sovereignty and self-determination as possible. This is one of the main reasons why the euro is and will remain in limbo. In monetary union’s positive early years, leaders queued up to claim credit for the euro’s perceived successes....

  10. 6 Irreparable errors
    (pp. 36-41)

    A procession of design flaws and implementation errors has become ingrained in the fabric of monetary union. The shortcomings were obscured for a while by the euro’s relatively problem-free technical introduction, enlargement of the euro area to include additional countries (led by Greece in 2001) and the initially successful adaptation to the trans-Atlantic financial crisis. However, since intractable difficulties started to break out, led by the 2010 Greek imbroglio, the euro’s operating mechanisms have been progressively deformed through a range of support and intervention measures, assembled usually through laborious compromises of ever greater complexity. The euro is being shored up...

  11. 7 The technocrats stumble
    (pp. 42-47)

    The EU bureaucracy – technocrats, officials, cadres from different backgrounds – faces the giant task of escaping the failures of the past in order to bring the euro crisis to a necessary resolution. In many cases, those responsible for past mistakes are still sitting at the levers of power. Government office has proved a fleeting experience for many forgettable euro political leaders, who have been swept into power on a wave of euphoria, only to be ejected in reaction to economic disappointment when the voters’ mood turns nasty. The technical experts embedded into the euro mechanisms are the only ones...

  12. 8 A bank unlike the others
    (pp. 48-52)

    On a sunny morning in late July 2012, in the chandeliered splendour of Lancaster House in London’s West End, an important milestone was set in the short history of the euro. The stately mansion, built almost two centuries ago for Britain’s Hanoverian royal family, was once the glittering venue for society balls. Today the building is used for official seminars and receptions when the British establishment wants to make a good impression, particularly on influential foreigners. On the eve of the opening of the Olympic Games, this was the venue for a promotional government conference as a showpiece for UK...

  13. 9 The Cyprus cauldron
    (pp. 53-57)

    Easter-time in the eastern Mediterranean can be chilly. But in March 2013 nobody in Cyprus expected the banks to freeze up. This divided island, split between Greece and Turkey after the Turkish invasion of 1974, yet a member of the European Union since 2004 and of monetary union since 2008, is an appropriately complicated place for the euro’s myriad contradictions to burst to the surface. Under the financial rescue for the island that was decided by European governments in March 2013, larger depositors in leading Cypriot banks were reduced to the status of unsecured creditors and had to accept heavy...

  14. 10 Sovereignty – the tipping point
    (pp. 58-63)

    Of all the issues influencing progress on monetary union, sovereignty provides the crucial tipping point. Members of monetary union are not – and maybe never will be – ready to give up key areas of national economic and financial power to produce a truly cohesive euro system that will survive and prosper. Genuine abandonment of sovereignty – rather than simply pooling it, as countries do routinely in areas where they maintain some semblance of control in international groupings – would be necessary in three areas to secure smooth running in the monetary bloc. First, countries would have to submit to...

  15. 11 Fear holds the key
    (pp. 64-68)

    Opposing fears about the outcome of monetary union act as a decisive block on sensible decision-making. One reason why the German political establishment – both left and right – has so far lined up in favour of bailouts of weaker euro countries is the widespread concern in Germany that a break-up of the monetary bloc would lead to a new German currency that would sharply appreciate compared with the present euro. This, it is feared, would bring a catastrophic collapse of German trade with the rest of Europe, with disastrous consequences for the entire European Union. Others, on the opposing...

  16. 12 Germany’s limits
    (pp. 69-73)

    Germany cannot and will not stimulate its economy sufficiently to lead the distressed southern nations out of the economic abyss. Trade and investment relations between Germany and the euro periphery have been steadily reduced. So even if the Germans were willing to give in to their neighbours’ insistence on Keynesian demand measures to promote their domestic economic recovery, this would have little positive effect. Germany’s economic interests are growing increasingly in the direction of European countries outside monetary union, such as Poland, Russia and Turkey, as well as faster-growing new markets in countries like Brazil, China, Indonesia, India and South...

  17. 13 The French connection
    (pp. 74-78)

    Fundamental disagreements over monetary union are increasing between the two key member states, Germany and France, amid much questioning over the compatibility of the two countries’ objectives and methods. As has been made clear by conflicting statements from President François Hollande and Chancellor Angela Merkel, France wants ‘solidarity’ while Germany seeks ‘competitiveness’. The duo accounts for roughly half the economic output of the seventeen-country bloc. Yet their structural ideas on renewing Europe appear far apart; communication between the two governments is at a low ebb; and mutual willingness to make concessions to help each other is fading.

    None of this...

  18. 14 The Bundesbank strikes back
    (pp. 79-84)

    The German Bundesbank – which, during past skirmishes, was uncharitably termed in France the ‘monster of Frankfurt’ – has been cut down to size. The European Central Bank has taken over its mantle. The German central bank no longer forms the vital enterprise behind European money. But it constitutes the nexus in the past, present and future of Germany’s unfinished drive to correct the continent’s ever-present tendency towards disorder. After a series of setbacks, the Bundesbank has reinvented itself and is back in business as by far the most important central bank among the ECB’s constituent shareholders. The Bundesbank no...

  19. 15 In Italy, more showdowns
    (pp. 85-89)

    The protest vote in the Italian parliamentary elections of February 2013 was a deep setback for euro optimists. The message of the populists’ victory contained many components: it signalled (unsurprising) displeasure with austerity; distaste for the political ruling classes; and desire for new faces at the helm. But more broadly, it was a vote against the country being led in a way that many Italians believed no longer benefits ordinary people. Italy will stumble on, a metaphor for the euro bloc’s well-practised art of muddling through. Because of Italy’s status as a founder member of the European Six that created...

  20. 16 The chimera of banking union
    (pp. 90-95)

    There are many potential advantages to combining Europe’s regulations on banking and finance in order to produce harmonised governance structures for banks. Doing so would reduce the threat of financial flare-ups, restart credit flows to hard-up countries, and enable better services for consumers and businesses. In mid-2012, European governments decided on far-reaching moves towards banking union. These measures appear, in theory, sensible and necessary; but they will not be put into effect for many years. The ambition has become entangled in intractable conflicts of interests and objectives. For it interferes with certain rights that governments regard – along with the...

  21. 17 The IMF’s European conundrum
    (pp. 96-101)

    Germany and Europe have manifestly failed to find the right approach to the role of the International Monetary Fund in various euro rescue operations. In late 2009 and early 2010, faced with the first signs of a looming economic storm in Greece, the German government and the ECB first tried to steer the IMF away from European involvement, on the misguided grounds that Europe could look after its own problems. The Fund was subsequently integrated into euro support actions, but has faced frustration about being co-opted into roles where it has often compromised on its principles of solid and sustainable...

  22. 18 Anglo-Saxon ambivalence
    (pp. 102-107)

    US concern over European woes runs deep. Ironic though it may be for a structure designed to foster stability, the euro bloc has become officially designated as the prime source of global economic risk, with wide-ranging implications for America’s financial and business interests around the world. On the other hand, the US response to Europe’s travails is not entirely free from duplicity. The Americans call repeatedly for Europe to show clear thinking and to enact speedy measures to end the malaise. In reality, the US has no strong interest in a radical solution to the euro crisis, nor any expectation...

  23. 19 Asia’s star rises
    (pp. 108-112)

    Not since the Second World War and the fall of Singapore to the Japanese army in 1942 has Europe’s star sunk so low in the east. Asian policy-makers have greeted the clash of civilisations and cultures in the euro bloc with stunned incomprehension. The plan for building Europe’s global status held particular resonance for the countries in the vanguard of world economic growth. In 1999, the euro appeared to many Asian central banks – especially to the Chinese and Japanese, the world’s No. 2 and No. 3 economies, with the largest currency reserves – as an instrument of economic salvation,...

  24. 20 War and peace
    (pp. 113-120)

    Internal and external paralysis is systematically reducing the Old Continent’s strategic relevance. Europe’s under-skilled and overstretched politicians will not hew quickly through the Gordian knot. Indecision and self-isolation are likely to feed off each other: a self-perpetuating retreat. Higher-growth areas of the world, rather than fruitlessly calling for Europe to resolve its woes in the interests of the international community, will simply sidestep the euro crisis and leave the bloc to resolve its difficulties in its own time. They may have to wait for a while.

    The major economic powers of the US, China and Japan will not press for...

  25. Notes
    (pp. 121-122)
  26. Index
    (pp. 123-132)