The ongoing European sovereign debt crisis had its origins long before the introduction of the euro.
In a few days time CIGI ’12 will be held in Waterloo. While the topics cover a wide range of governance issues, it is clear that international governance questions (notably in the financial sphere) will play an important part. At the risk of neglecting some of the governance challenges facing the international community, it is worth devoting a little space to how developments in Europe are coloring the global community’s ability to deal with the many other economic governance problems it faces. The relative calm we are seeing from Europe stems in part from the more pressing concerns around the US election and the looming "fiscal cliff" faced by the federal government. Once the elections are over, the intractable Greek problem, together with others including the general economic slowdown across the continent, will eventually make the headlines again.
The ongoing European sovereign debt crisis had its origins long before the introduction of the euro. A disparate set of countries, seemingly united in their desire to put aside centuries of conflict, and recognizing that their future economic prosperity and political relevance in the international community required some common purpose, opted for the relatively easier route of economic and monetary union over some form of political union. Contrary to the impression given by some observers, the flaws inherent in Maastricht Treaty were known long before the economic eruption took place beginning in May 2010. The policy makers who devised and negotiated the creation of the European Union, followed by the single currency, knew very well the limits that sovereign nations and their electorates would tolerate on the road to something approaching a single entity called Europe.
Unfortunately, we are still in damage control mode with the current group of politicians, many of whom no doubt mean well, looking for the minimal set of policies and reforms that will salvage what’s left of the European ideal and preserve the euro. This is the only way to understand how European policy makers are treating the unsustainability of Greece’s debt and its dismal economic prospects. Similarly, Spain’s refusal to the ECB and acceptance of the strictures of its Outright Monetary Transactions (OMT) program, combined with the obstacles of a banking union, reflect attempts to deal with serious issues in a piecemeal fashion rather than through bolder, and politically riskier, actions. Yet, in both cases, as well as in the trials and tribulations faced by Portugal and Ireland, the solution to problems whose origins are starkly different is the same. Greece simply cannot support its debt and is, for all intents and purposes, insolvent. In Spain, a relatively sensible fiscal policy has been shattered because a housing bubble, fueled in part by those in the EU who insist they will not share the burden of its economic consequences, led to the sovereign taking on private sector debt. Once this link is broken it is not easily unwound. However, in each case, Europe’s answer is austerity without meaningful reforms, and an unwillingness elsewhere in the EU to acknowledge that a common economic and monetary policy requires burden sharing.
Gone it seems is the dream of a federal Europe among the member states, even if the supra-national European institutions are proposing reforms that will lead to a more federated structure. Part of the difficulty is that proposals to create a more cohesive whole tend to give less precedence to democratic accountability than to the need to preserve a faulty structure. On the political front, a more persuasive vision of Europe is needed lest the current pressure towards diverging motives and ideals destroy what’s left of European unity. On the economic front, a sensible set of Europe-wide financial and fiscal policies is needed rather than revised stability and growth pacts that are just as likely to be ignored as previous incarnations of such attempts at fiscal responsibility. The European Central Bank, perhaps the only properly functioning European institution, cannot take on the entire burden of saving the European dream. Only a more thorough renewal will restore that objective.
In a future post I will briefly discuss how I see the current state of the problem of global financial regulation and the international governance of capital flows. This is one of several sessions at CIGI’12 and I am fortunate enough to have been asked to write a background document for that session.
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