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In Every Nation for Itself: Winners and Losers in a G-Zero World, World Policy Institute Senior Fellow Ian Bremmer illustrates a historic shift in the international system and the world economy—and an unprecedented moment of global uncertainty.
by Elizabeth Pond
After 18 months of too-little-too-late, one hesitates to cheer prematurely. But maybe, just maybe, the European Union is finally rediscovering its old trick of turning crisis into integration.
In fact, what has grown into today's European Union started out as a bold response to World War II. A few visionaries proposed the unthinkable: joint control of Europe's raw materials for weapons—coal and steel—by those sworn enemies, France and Germany. This, said the French architects of the scheme (with German Chancellor Konrad Adenauer as a silent partner), would make future wars impossible on the bloody continent of Europe.
Thus they invented the 20th century's new form of governance—a hybrid that is less than a federation, but in its "pooling" of national sovereignty is vastly more than a confederation. And they set in train a dynamic of responding to recurring crises by treating them as crucibles. Time and again, when resentment of diminished national sovereignty erupted, governments would contemplate leaving the new European Community. But each time, the palpable benefits from the integration already achieved would outweigh the costs of withdrawing from the club and losing the insider's influence in shaping the future of the club. And often enough, the frustrations of having to decide policies by a rolling consensus were overcome not by retraction, but by progressive expansion of the areas of common decision.
This cost-benefit calculation prevailed repeatedly as member states removed their border posts to allow free travel within the European Community, gave up weak national clout to maximize their collective impact on world trade standards, wrote intrusive rules to enforce national adherence to their aspirational single market, and intensified cooperation to cope with the forces of globalization.
The pattern continued with the crisis of German reunification after the Berlin wall fell in 1989. Even after decades of remorse over Hitler's crimes on the part of the West Germans, Paris and London still did not fully trust their ally. They feared the instant 25% jump in its total population as East Germany merged into a democratic, united Germany. Yet in the end, the French decided that they could best keep their powerful neighbor in check by embracing the Germans in a new common currency (thus trumping Europe's de facto central bank of the German Bundesbank with a de jure European Central Bank that could only increase France's voice in the continent's monetary policy).
The experiment has worked. It has given Europe its longest peace in centuries. Today's French and German teenagers find it incomprehensible that their grandparents viewed the other as foes. The successors to autocratic rule in Spain and Portugal were socialized into democracy. Prosperity spread across the continent from north to south, then from west to east as Poland, Hungary, and fellow Central European states spun out of the Russian orbit and carried out the drastic market and democratic reforms that qualified them for membership in the European Union.
There was one catch to the 1990s' European Monetary Union, however—a "birth defect" that the founders assumed would be corrected by a natural convergence of members' economies on the pattern of earlier French convergence toward German standards under the pressures of a single market. The defect was that the EMU—which was deliberately founded on political impulsion rather than economic rationale—split monetary and fiscal policy. It assigned the former to the new European Central Bank, while leaving the latter within the competence of individual sovereign states. There was no mechanism to coordinate the two, no common economic governance—and no possible way for Greece to devalue its way out of its huge debt burden, since it no longer possessed a separate national currency.
This flaw was magnified in 2007/08, when the worst financial crisis in 75 years hit the globe and when other Europeans discovered in 2009 that the Greek government had falsified its economic data in order to join the new euro club. Once inside, Athens was able to borrow at the same low interest rates as much more disciplined Berlin. It went on a spree, building up a debt bubble. When the bubbles burst, the debt crisis of Greece's mere 2% share of EU gross product spread "contagion" to Ireland, Portugal, Spain, and finally even the much larger Italian economy. At that point, it threatened to break up the eurozone.
As a new generation of leaders who had not lived through the devastation of WWII rose to the top, they began to doubt the very project of the EU. Taking for granted the achievements of their predecessors, these new leaders thought they could muddle through with the usual sluggish consensus-building among the 27-member European Union and 17-member European Monetary Union. German Chancellor Angela Merkel—the most powerful European head of government—thought she could just follow her innate political instinct for "leading from behind" and postponed decisions until circumstances might evolve to produce plausible solutions. Her dithering only aggravated the crisis, however. Each step to help Greece proved to be too little too late, spooked markets, and increased the still unmet costs of rescue.
As usual, Germany had quietly done its homework in the fat years and implemented economic reforms that gave it a competitive edge and a large trade surplus in the lean years. As usual, Greece had not done its homework and ended up with debts it could not conceivably repay without massive financial assistance. As usual, the rest of Europe expected the rich west Germans to pick up the tab as they had done in funding the European Community in its early postwar decades and then again after reunification in investing a trillion dollars to lift the poor east Germans to something close to the west German standard of living.
Unusually, German taxpayers rebelled. The boulevard press sniffily called on all those Zorbas to work as hard as the Germans and not retire in indolence at 61—and, for good measure, prodded Greece to sell its Aegean islands to make up the debt shortfall. A popular German don't-pay movement vowed that the European Union must not become a "transfer union." The German constitutional court agreed, and in ruling on successive citizens' appeals ordered the government in Berlin to get parliamentary approval for the surrender of each new centimeter of sovereignty to Brussels. Within Merkel's own coalition the most serious revolt by backbenchers in her six-year incumbency attracted more and more opponents of German payouts to profligate fellow EU states.
Chancellor Merkel herself lectured the Greeks that "we can't have a common currency where some get lots of vacation time and others very little. That won't work." Politicians ruminated about either expelling Greece and other miscreants from the eurozone or forming a new core of virtuous north Europe economies and splitting the European Union.
At this point the British, French, and other Europeans no longer feared domineering Germans. Instead, they complained about obverse German neglect of allies. A selfish "nationalist" Germany had pocketed the prize of unification from its European engagement, they charged, and was now going its own way, abdicating from EU leadership, turning inward, and refusing to pay enough to rescue Greece. Germany had forgotten its European calling, they contended, and Merkel was in any case too weak politically to make the radical decisions that were now needed.
By August, the financial contagion spread beyond smaller EU economies to threaten the Italian economy, the continent's third-largest. This put the survival of the whole euro currency at risk. Stock markets fell. Merkel nonetheless went on vacation in the Tyrolean Alps, to a storm of criticism. Even Helmut Kohl, her political mentor in the Christian Democratic Union (and the Chancellor who had negotiated European monetary union) broke his decade-long silence in retirement to accuse her government of having abandoned its partners and having lost its compass and its European ideals.
But then the unexpected happened. When Merkel returned to Berlin, she no longer dithered. She argued passionately to the dubious German public and to her coalition parties that while Germany had paid the most for European integration, it had also benefited the most, and it must continue on this path. "If the euro fails, Europe fails," she proclaimed.
And while she offered no new German money for euro rescue funds, she did offer concrete new proposals for leveraging already pledged funds up to a kitty of a nominal one trillion euros. She negotiated hard for a comprehensive agreement on the fiendishly intertwined issues of stabilizing weak EU economies, saving the euro, recapitalizing Europe's paralzyed banks, and forcing exposed German and French banks to accept "voluntarily" a write-off of up to 50% on their old Greek bonds. She committed Germany to seek a European fiscal union with oversight of national budgets and an eventual political union, even at the risk of yet another nightmare round to approve a new EU treaty. She also strong-armed her own Christian Democrat recalcitrants into endorsing the mission.
On October 26, she went to the showdown EU summit—previewed by BBC journalists as a financial Armageddon—with the explicit backing of all Bundestag parties except the Left of the reborn East German Communists. She acknowledged the dangers in Europe's "worst crisis since World War II" in her speech to the Bundestag hours before the summit. "If the euro fails, Europe fails," she repeated. But, she vowed, "That must not happen."
Merkel's new-found determination to save both the euro and Europe—which led to Wednesday's comprehensive framework deal—is one of the clearest examples of the EU pattern of turning crises into crucibles for further integration.
But is it already too late to stop the rot?
Certainly the evolution of Chancellor Merkel and the monetary union so far merits two cheers. The third cheer still awaits the judgment of the markets.
[Photo courtesy of European People Party]
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