This post was produced for the Global Economic Symposium 2013 to accompany a session on “The Future of Europe.” Read more at http://blog.global-economic-symposium.org/.
On the first of July, the European Union welcomed its newest member. After a decade of negotiations, Croatia can finally wave the EU flag, and goods can travel freely between the former Yugoslav country and two of its neighbors, Hungary and Slovenia. Fireworks lit the sky in Zagreb, and the whole city seemed to cheer to the tune of “Ode to Joy.” It was a long-awaited dream for a country that has seen war and poverty, a dream well known to residents of my own country, Romania.
And yet the European dream is not a particularly pleasant one right now, and once the glow of the last firework finally dies down, it is perhaps time for Croatia to sober up and take a long, hard look at the challenges ahead. A country with unsound fundamentals, “junk” debt, and twenty percent unemployment has to navigate the already stormy seas of the European Union with care. Because for all its remarkable political achievements in uniting a host of nations that were at war for most of their history, the EU has failed miserably in its economic handling of those very states.
The European financial situation is dire indeed, and while the reports of the Eurozone’s death have been greatly exaggerated for years now, there is no doubt that there is a massive financial and economic problem at the heart of the Common Market. The unsound economic judgments of the European South, living beyond its means on cheap borrowed money, and the brutal reprimand from the European North, which has pushed unsustainable and frankly useless austerity measures on the worst offenders, have created a climate of political and, even worse, economic mistrust in the EU. The European solidarity of the early 90s, without which there would be no union, seems to have been sacrificed on the altar of macroeconomics.
A solution doesn’t seem close at hand. The only logical way to properly rescue the Euro would involve further sacrifices to be made across the board, with higher inflation in the core countries and devaluation of goods and services in the periphery as per Mr. Sinn’s modest proposal. In countries like Greece and Cyprus, where austerity has failed, Mr. Sinn is even advocating tactical Eurozone exits. This would destabilize the Union further and create even greater income discrepancies between equal members. And as previously stated, not even the IMF managing director is still pushing for greater austerity, focusing instead on a shift towards growth. The EU’s growth, however, is fickle at best.
There is another option, passionately argued for by none other than George Soros. Soros lays out a choice before Germany as the driving force and policy decider of the Eurozone: accept Eurobonds or leave the Eurozone. Neither of the two choices is simple of course. There is no precedent for leaving the currency union, and the move would likely have a dire impact on the German economy. Eurobonds seem even a further stretch, as not only are they so unpopular in Germany that the motion would likely need a referendum that would be doomed to fail, but it is actually impossible within the current legal boundaries of the Union: Article 125 of the Maastricht treaty specifically forbids it.
So what is there to do? It’s becoming clear that at the current rate of minimal intervention, the Eurozone and, likely, the EU do not have a terribly bright future.
The solution to all the EU’s woes is, unfortunately, very unpopular with the public. Ever since the Maastricht treaty, it is pretty clear that the framing of the EU is faulty in that we have a monetary union without a proper political one and without a single fiscal policy. The endless talks and half measures are not only affecting the EU’s political credibility but its fiscal and financial credibility as well. The EU needs to become a more perfect union. Its current hybrid form is quickly showing its limitations, especially in regards to fiscal issues. Whether or not this is attainable remains to be seen in the coming years. But hard, unpopular decisions and political capital rarely go well together, and there are upcoming federal elections in Germany. Let’s all hope the fireworks over Zagreb were a sign of good things to come.