When George Papandreou proposed a referendum in Greece on the austerity package, an attempt was made to give Europe back its connection to the people. It was morally right but strategically and tactically flawed. It promptly brought the demise of the Papapandreou government in Greece. He should be praised for his calm and persistent approach that, in the face of mounting unpopularity in the past year, allowed his country to avoid a plunge into unpredictable depth and even direr suffering. So should be the Spanish Socialists, utterly defeated in today’s elections. Punished is probably a better term describing the fifteen-percentage points difference between Rubalcaba’s PSOE and Rajoy’s PP. All governments in the countries most hit by recession and instability, from Ireland and Greece to Italy and Spain, will have new governments by next week.
The Eurozone core countries are not immune either. The future is uncertain for both president Sarkozy and chancellor Merkel as they find themselves on equally shaky ground. 2012 will probably bring more uncertainty and new rearrangements following (or not) elections. However, more fundamental questions need addressing in Europe if it is to fight another day. Just changing governments or operating choreographed reshuffles, bringing in various technocrats as was the case with the “bankers’ government” headed by Mario Monti in Rome, will certainly not suffice.
There are arguments on the side of European leaders that pushed for an about-face on the Greek referendum. Mario Monti is arguably an improvement, in every sense of the term, over the quirky ex premier Berlusconi. Except a short-term, but still dangerous, exception from democratic rule. Monti’s cabinet may be popular inside and outside the Parliament but it is certainly unelected.
Economic and market stability imperative are paramount today. However, this should not be an argument for an abut-face on the profoundly democratic nature and accepted vision of United Europe. There is a moral imperative to listen to Europe’s citizens. Equally there is the need for a renewed vision, one to guide them away from populist excesses and nationalistic retrenchments.
This is a view shared by many in Europe’s periphery. While Romania is not in the Euro-zone and was spared many of the immediate effects of the Euro crisis, like the rest of Europe’s periphery, we feel its knock-on effects. In the event of a full-blown default in the region, we would feel it without any safety barrier. Despite apparent better macroeconomic indicators, last week, the Ministry of Finance registered a major blow through its failure to launch a government bonds issue at a decent rate.
The European periphery is in equal turmoil. For many this term has come to be derogative, associated with higher risk and lower standards. This is also a frontier where perspectives are different and the urgency of keeping the fort together more evident. For all our flaws and shortcomings, this periphery has kept some edge to Europe’s industrial engine. We have fueled growth via markets and also contributed to Europe’s competitiveness via lower costs and valuable skills. In return, the periphery got a fighting chance for prosperity and access to values the average European finds anodyne.
We are not perfect, and we can create havoc in the machine. Still, when it comes to crisis we can endure. But we also see the limits of the club we joined. We worry to have joined the party when the merrymakers wake up with a hangover. In our less sheltered neighborhood we put a premium on Europe’s values, and primacy as a barrier against discretionary and ham handed approaches. We also value the special connection Europe and the US enjoyed.
The crisis is sapping EU’s political and economic energy. European Council after European Council important items are pushed aside as Europe focuses on its existential battle with unsustainable sovereign debts. Other frameworks for global decision with crisis management competences are also getting bogged down. The almost exclusive focus on Greece at the G20 meeting in France is a conspicuous example. There is an increased sentiment we are failing global agendas. All while Europe is dissolving in its economic quagmire and the US in its own partisan paralysis. On the periphery this is keenly and apprehensively felt. It is frankly not that our voce is diminished in the roar of the markets, but that parochial priorities are keeping but a handful of contributors in the debate.
The Greek crisis is a dangerous smokescreen that allowed bigger problems to fester and grow into insurmountable mountains, effectively doomed policies, and a diminishing international profile for Europe. At the edge of the periphery we have a lot vested in this profile. We depend on it as we depend on Europe’s investment.
The current situation is one markets abhor and citizens equally dislike. The retrenchment is manifest in the simple and clear statements that have come to prevail in the media and political discourse. It is understandable why so many German citizens polled in the past few days want Greece out of the European Union. It is less understandable to hear politicians that say that the Euro zone crisis is the inevitable unraveling of the EU. This is why it was a great news hearing Junker, the head of the Eurozone ministers, speaking in very clear terms about the lies and populist half truth that dominate the debate in Germany. This is part of the solution. Shattering the misplaced illusion that somehow the problem rests with the lazy south and problematic periphery is essential.
The fundamental flaws in European Union’s design were not addressed via enlargement. Partly because of a misuse of direct democracy in referenda, we failed to equip the EU with adequate instruments. We sacrificed the original constitutional treaty and replaced it with the contorted Lisbon Treaty. We have neither an efficient Commission nor an effective mechanism for balancing between the democratic requirements of an enlarged and diverse Europe and its gapping productivity divides.
The democratic deficit was tolerated while Europe was growing but it has become an incontrollable spiral in the midst of crisis. Markets and their demons, quite content with the results of EU enlargement and Germany backed stability in the boon years, are demanding higher return for their risk. The levels of uncertainty are pushing sovereign borrowing rates so high on the financial markets that they are simply not sustainable. Italy, Spain and even France are feeling the acute pressure. The latest victim, Hungary had to go back to IMF. Only its comparatively small size allows for that. There is a growing chasm between what markets expect and what politicians can deliver.
The responses available at national level are even contributing to the spiral. Austerity measures meant to address budgetary deficit are eating away at domestic consumption and growth and are paralyzing domestic lending markets.
Lacking a true European wide polity, with divided audiences and voters, politicians are too often driven by local and immediate perspectives. With elections taking place in several of the major Euro zone economies the prospects are not rosy. The combination of flawed institutional makeup, hyper reactive markets and captive politicians is toxic for the current needs of Europe and may be deadly for its ambitious original vocation.
The retrenchment around a core set of decision makers in Europe is neither democratic nor is it effective. There is always a natural tension linking the core and the periphery of a system. The risk of centrifugal destructive process has never been greater in the European Union. A Europe with multiple cores may well emerge form this mismanaged crisis. A fabled Europe a la carte, a pick and chose model, where the UK would be in the driving seat of a skeleton political structure with limited impact and Germany would reigning over a core of northern economies acting like a de facto fiscal union. This would certainly be the end of the ambition for Europe to be a net global contributor.
Europe’s southern periphery, with Greece, Italy and Spain, remains for now at the pinnacle of the Euro sustainability debate. But the periphery is by no means the essence of the crisis. The periphery has come to be equated with profligate spending, cavalier attitude to budgetary transparency and overall lacking in good economic governance. But more importantly, it came to represent the limitation of both the monetary mechanism for the Euro and economic governance in Europe. Structural problems are not limited to Greece or Italy and many are exacerbated by the very way the EU (and its ECB) operates.
These disequilibria had functioned as competitiveness drivers for the EU wide manufacturing sector and they are part and parcel of the German export success. All Audi engines are today produced in Hungary. Volkswagen and Skoda both export to China among other places and their production relies on the ultra competitive workforce of Spain, Hungary, Czech republic and Poland. Romania is a hub for the automotive industries with over 800 companies mostly based on investment from the Euro zone producing in the country. Equally well represented with tens of thousands of employees is the IT sector.
The countries on Europe’s periphery are at the receiving end and at the mercy of the markets. Some but not all, have seen their borrowing rates drop but investors and business are weary and petulant over the significant contagion risks if the Euro zone collapses. Already rates are evolving unpredictably for most countries except Poland. With the crisis raging, they see investments stop and growth rates diminishing. Employment is raising and their vulnerable social systems are brought to their knees. They see not just mounting foreign debt with unsustainable rates, but also an austerity driven, downwards spiral of the quality of life. The population and communities in Europe’s periphery have neither the provisions nor the social nets to support them. They need a strong Europe not just to finance their growth but also to create long-term reason for investing in the periphery. The Commission was in normal times providing effective tough love but also served as conveyor of the periphery’s interests. Nowadays with the voice of the Commission diminished and the circle of trust reduced to single digits in the Council they are feeling isolated.
Europe cannot spend its way out of this crisis but it certainly cannot wear it out by austerity only. Balancing budgets is a good idea in general but austerity in face of the current crisis is not the proper response. The consumption shrink caused by the economic slowdown is compounded by the one-sided austerity policies that were the knee-jerk reaction by many governments.
The put back the trust in the Euro zone and European economies we need to be bold. A clear plan by the European Council, Euro zone ministers and ECB shall address these fundamental discrepancies on the longer term and not just roll-on the risk for next year. A clear plan and inclusive decision-making would go a long way to appease the markets and give a basis for good national governance and return to investment. This requires a strong and effective Commission and a functional European Stability Mechanism that includes both current and future Euro zone member states. Decision-making should be as collective as the burden sharing is. I do not believe the citizens of Europe are prepared to give up on the European Union as a joint political and economic vision and a harbor for prosperity and justice.
Without a fiscal union, current predicaments of the EU need to be addressed with more courageous risk managing provisions or significant redistributive policies at the scale of Europe. As the latter are almost impossible to achieve today, the focus should be on the former. The EU can use the European Stability Mechanism as the basis for a flexible but transparent and effective way to mange investment and credit risk across the EU. This would allow the markets to rally around a credible plan not just to shore those with a credit risk but for longer-term aggregate European growth.
The signs are turning. I am not saying it because of changing and more responsible popular sentiment or because of a bunch of technocrats entering the first line of decisions. Rather because we have hit a sort of rock bottom. When France and Spain have to borrow at close to 7 things need addressing. The ECB and Draghi are already changing cap on the direct lending topic. It will be messy and it is critically important that all states are part of the solutions. The letter by 13 member states on the new financial perspective is a good sign the periphery is getting organized. Even Lord Heseltine the former British PM believes the joint French German determination and interest will save the Euro and thus Europe from a catastrophe.
We have a European Council upcoming in December. This vision should be on the top of the agenda. If current governments do not do it credibly, the citizens will eventually elect those that will. And, on the periphery, time is running out. Andrei Tarnea