Can the EU be saved?

Europe’s grand experiment seems to be failing

by Jason Kirby and Michael Petrou

States of disunion

Reuters/Yiorgos Karahalis

Until recently, the tiny German town of Guben was best known—to those who knew it at all—for two things. With only the narrow Neisse river separating it from the Polish town of Gubin, it is one of few place where Germans and Poles live so close together. That, and Guben is also where the controversial anatomist Gunther von Hagens, famous for his museum displays of skinless human cadavers seated at poker tables, set up a factory six years ago to treat and preserve corpses.

Now Guben’s mayor, Klaus-Dieter Hübner, has set off alarm bells in Europe by calling for border controls to be put in place to stop Polish “criminals” from looting German businesses. Since 2007, when Poland joined the Schengen zone, a border-free travel area consisting of 25 European countries, Germans and Poles have freely criss-crossed into each other’s countries to shop, dine and work. With his call for security checks at the border, Hübner has challenged one of the pillars of modern Europe: the free movement of people and goods between nations.

Taken on its own, the border squabble in Guben is a seemingly minor concern, but it comes as the twin forces of economic stagnation and surging nationalism threaten to tear Europe apart. Even as European leaders struggle to halt the spread of the debt crisis—a task that they increasingly appear unable to handle—a wider backlash against European integration poses an existential crisis for the continent. Europe is failing, both economically and politically, leading to the question: can it be saved, or is Europe destined for the embalming slab in Guben?

The most immediate threat to Europe is the infectious debt crisis, which some argue will inevitably lead to the collapse of the euro currency zone.

After decades of unsparing social programs, not to mention bank bailouts and stimulus measures, many European nations are saddled with massive debt loads and deep deficits. Of those known unflatteringly as the PIIGS—Portugal, Italy, Ireland, Greece and Spain—the Greeks are in the worst shape by far, with debt levels forecast to rise to 1.6 times the size of the economy in 2011. As investors lost faith in Greece’s ability to repay its debts last year, interest rates skyrocketed, driving up the country’s borrowing costs and pushing it closer to default. One bailout followed, then another in July of this year, bringing the total rescue bill to $360 billion. Rather than assure skittish investors the crisis was in hand, the focus immediately shifted to the debt problems facing bigger nations like Spain and even Italy, the world’s seventh-largest economy.

The European Central Bank is fighting back by aggressively buying up the debt of struggling countries in a bid to suppress rising interest rates. At best that’s a stopgap measure, though. Nor is a bailout for Italy on the table. The total cost to rescue Italy and Spain has been pegged at $1.4 trillion. And so governments have been forced to take a slash-and-burn approach to their budgets. At an emergency cabinet meeting in Italy on Aug. 12, the government agreed to a US$65-billion plan to eradicate the country’s deficit by 2013. “Our hearts are bleeding,” said Prime Minister Silvio Berlusconi.

Yet austerity alone will only force European economies into a vicious cycle of spending cuts, tax increases, recessions and riots, says Cardiff University economist Patrick Minford. The only long-term solution to revive growth, he says, is for the most indebted nations in Europe, including Spain and Italy, to give up the euro currency. “It will be messy and it will be painful, but they don’t have a choice,” he says. “Otherwise these countries will remain basket cases into which money has to be shovelled.”

Often when countries are faced with hopeless insolvency, they devalue their currencies to make their exports more attractive. Since the PIIGS are tethered to the euro, that option isn’t available. Minford argues that most of the countries in Southern Europe are likely to default whether they stick with the euro or not, so they’re better off controlling their own currencies. After all, one of the advantages of adopting the euro in the first place was the promise of low interest rates that came with being part of a large monetary union. Now that investors are demanding a risk premium, in the form of higher interest rates, before they’ll even touch Greek, Spanish and Italian debt, the euro has lost much of its appeal. “If you’re paying high interest rates inside the euro, you might as well leave and re-establish your economy with a properly valued currency,” says Minford.

No one is exactly sure how such a process would unfold. There are no written rules to address how a country would exit the eurozone. In the meantime, the crisis has put the expansion of the eurozone, beyond the current 17 member nations, in doubt. Several Eastern European countries that were once eager prospects for adopting the euro, like the Czech Republic, Poland and Latvia, have signalled they may have more to lose than to gain by giving up their national currencies.

It’s often said the EU is like a bicycle: it must move forward or else it will topple over. As the crisis over the euro spreads, the bicycle has all but come to a crashing halt and is tilting dangerously to the side.

As bad as the continent’s debt woes are, Europhiles are even more concerned about the cracks appearing in the most fundamental element of modern Europe: unrestricted movement. While the call by Guben’s mayor for border controls has fallen on deaf ears in Berlin, in other parts of Europe barriers are already going up. Denmark re-established checks at its land border with Germany and at its bridges and seaports in July with the stated goal of stopping illegal immigrants and criminals who have breached the outer edges of Europe’s border-free zone. Under the Schengen agreement, signed in 1985 and of which Denmark is a signatory, members can only impose controls at inner borders on a temporary basis “in the event of a serious threat to public order or national security.” No such threat exists, yet customs officials have been pulling over random cars. Justifying the new restrictions, Danish Finance Minister Claus Hjort Frederiksen alleged: “We have seen too many examples of violence, break-ins and brutal criminality committed by perpetrators who have crossed the borders.”

The changes are mostly symbolic. Passports still won’t be required, and not all incoming cars are stopped. But this hasn’t softened their emotional impact. Even those who bristle at the European Union’s sclerotic bureaucracy will often concede it’s nice to be able to so easily move from country to country within the union. Now, Denmark’s new controls reverse a long-running European move toward open frontiers.

The reaction from the rest of Europe has been quick and hostile. Jörg-Uwe Hahn, a parliamentarian from the German state of Hesse, urged Germans to vacation in Poland or Austria rather than Denmark. Danish tourism agencies, which usually profit from renting summer cottages to Germans, have reported cancellations and complaints.

Charles Kupchan, a professor of international affairs at Georgetown University, describes Denmark’s decision as part of a broader “re-nationalization of political life that is sweeping Europe.” It’s driven, he says, by continent-wide concerns about immigration, the debt crisis, and a lack of leadership from traditional EU powerhouses, particularly Germany. “The borders of EU member states are effectively coming back to life,” he says. “The developments of the last three to five years raise very troubling questions about the project of European integration. For the first time, it is reasonable to question whether Europe has reached its high-water mark and will either go no further, or will slide in reverse.”

The first signs of trouble for European integration didn’t start with the economic crisis. Kupchan points to failed referendums in France and the Netherlands in 2005, in which voters overwhelmingly rejected the European constitution. Yet the debt crisis has exposed the limits of European togetherness and put member nations on a collision course in ways not seen in decades. In Germany, resentment is growing at the prospect of more bailouts for spendthrift Mediterranean Europe. Earlier this year, the German newspaper Bild published a photo of a Greek banner that labelled German Chancellor Angela Merkel and French President Nicolas Sarkozy “Nazis,” complete with the yellow stars of the EU flag rearranged into a swastika. The headline blared: “We pay—still we are abused!” Meanwhile, a new survey in the Netherlands found the majority of Dutch (54 per cent) want Greece ejected from the EU rather than continue the bailouts. Fully 60 per cent of respondents said the Netherlands “should stop lending money to other eurozone countries now.”

The grinding recession in parts of Europe has even led to outright protectionism. With Spain’s unemployment rate at 21 per cent, more than twice the EU average, the government sought to protect its labour market by banning Romanians from looking for work there. (Romania joined the EU in 2007.) In mid-August, the EU Employment Commission approved the curb on Romanian workers until at least the end of 2012. While the ban doesn’t impact Romanians already living in Spain, the move opened the door to further restrictions and extensions.

The problem—at least for those who favour the “ever closer union” advocated in the 1957 European Economic Community Treaty—is that the process of European integration has always been an elitist project. Most citizens of European countries ignored it. But now the EU has become politicized, and in many circles unpopular. “What’s so troubling right now is that the trend lines are toward re-nationalization, and no major politician is doing anything about it,” says Kupchan. “Politicians are being led by the public, rather than vice versa. And the European street is growing increasingly anti-Europe.”

That sentiment is reflected in the polls. Europe’s far right has enjoyed an electoral resurgence in recent years. In France, polls suggest Marine Le Pen, the daughter of the far-right leader Jean-Marie Le Pen, may make it into the second round of voting during next year’s presidential election. The Swedish Democrats took 20 seats last year, entering parliament for the first time (decked out in pastoral national costumes), while in April, True Finn leapt from obscurity to become Finland’s third-largest party. It’s all part of what Edmund Stoiber, a former Bavarian politician, has called a “renaissance of nationalism.”

Even in Greece the crisis has spawned a backlash from the hard right. Earlier this month, hundreds of rampaging fascists, clad in black and wielding clubs, took to the streets and attacked dark-skinned immigrants.

As rising right-wing populism continues to spread, it is likely to lead to even thicker borders. Italy says it is overwhelmed by refugees from North Africa and wants help from other members of the union. Countries such as Germany and France counter that asylum seekers arriving in Italy simply pass through on their way north. Earlier this year, Italy issued temporary residency permits to refugees from Tunisia so that they could travel within Europe, and move on somewhere else. France responded by reinstituting controls on its border with Italy, trapping the Tunisians there.

Piece by piece the European political and economic experiment is failing. Putting it back together will be a monumental if not impossible task, says Minford. Yet the cost of failure will be the final end of Europe as an economic power. “The sad thing about this crumbling of the European dream is that there will be a revival of economic nationalism,” he says. “You can’t separate the different bits of this whole experiment in union. If one part goes, the rest will be chipped away at until it’s a patchwork of countries that are increasingly less relevant to the global economy.”




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Can the EU be saved?

  1. This is what Europe has been working towards for over half a century…a united Europe. No more old disputes and the resulting wars.

    Now it’s another crunch ….they are either in or they’re out. They’ve integrated and solved problems all along the way…now it’s time for final integration.

    Every human project has problems along the way….this is just one more.  A big one to be sure, but just another problem to be solved over all.

    Why is it that our first reaction is always to throw our hands in the air, and give up?

    Did anybody say it would be easy?

    • OE1, you are far too seasoned to be such a wild-eyed, raving optimist.  Have you any idea at all what 21% unemployment means to a country like Spain?  Do you realise that in some parts of the country the unemployment rate is 49%? I don’t think so. And do you realise that, within the single currency construct, there is nothing, Nada, that Spain can do to help its citizenry? Think about the realities before you plough on all sentimental for a lost world of dreams.  

      • Unemployment in Spain means the same as unemployment in any country, and the currency has nothing to do with it.

        If they want to fix their situation, then they have to decide whether they’re in or out….and get on with it.

        There is no sentiment involved, it’s reality that’s causing the problem

      • Fiscal policy is only one tool governments have towards maintaining optimal employment levels.  This is way outside my area of expertise, but I believe strictly increasing the money supply during periods of high national debt can have a lot of adverse effects, such as severe inflation.  The classic example here would be interwar Germany, although I don’t think the example is too useful to contemporary Spanish issues in other ways.

        I suspect part of the problem is that the high debt levels & their accompanying covenants and restrictions are preventing the Spanish government from using most of the other tools, such as financial stimulous.

  2. The fallacy of the EU is simple economics. First, if you are going to have a common currency, you need to have an optimal currency area. That means that the business cycle of EU members should be relatively coordinated, and that there should be significant gains from greater economic integration. Fusing a developing ex-communist periphery to a cluster of developed countries – which are plenty different themselves – ensures difficulties in coordinating monetary policy.

    Second, while the convergence imposed upon EU members does reduce barriers to trade, it also reduces Europe’s institutional diversity. In the long-run, that may make the EU more crisis-prone and less innovative. Just as planting different strains of wheat can help protect against disease, having different models of capitalism may make some parts of Europe more resilient against economic trouble. This benefits the whole of Europe by ensuring everybody doesn’t sink at the same time. 

    Different institutions may also work better for different technological paradigms. A big command economy made sense for industries like steel, or war production. A limited government (but with a good university system) makes sense for the era of the information revolution. Institutional diversity also works alongside the product cycle. For instance, American-style capitalism was good at innovating advances to the automobile and expanding production in its early years. However, as a mature technology, today auto production requires well-educated median workers, and cheap healthcare. Without Canada (and now Mexico), auto production would have died off on this continent. 

    Finally, the EU is unsurprisingly prone to collective action failures. A country like Greece, or even Italy, is small enough as a proportion of the whole that it can get away with bad policies for a long time. Kind of like how countries today emit large amounts of C02 – they know its a problem, but they capture the benefits of pollution, while the costs are distributed equally around the rest of the world. Sometimes having a single strong country can be beneficial, in that they may provide certain public goods. So far Germany has filled that role, but it isn’t clear that they can continue to do so indefinitely. Germany is the biggest economy in Europe, but others are not much smaller – they could probably stomach problems in a Greece, Portugal or an Ireland but not a Spain or Italy.

    There should be Europe-wide free trade. There may also be other things that Europe can benefit from doing in common. However, far too often the European Union has gone beyond those goals in order to serve a political mission – avoiding a return to a Europe of warring nation-states. As Canada and the US reach the 200th anniversary of the last time they went to war, however, I think it should be clear that political integration is not the only way to promote peace.

    • Good comment except for the analogy calling CO2 pollution thereby revealing indoctrination in ascientific global warming memes.

    • The same historical antagonisms that helped to destroy the Warsaw Pact will also undermine the European Union. The French and Germans, Germans and Hungarians, Hungarians and Romanians, Romanians and Bulgarians, and Bulgarians and Greeks all hate each other. A rigid adherence to Marxist-Leninism didn’t make mutually antagonistic peoples of the communist bloc love each other. I don’t think any mutual economic interest will accomplish the same thing, either. 

      While people have the ability to reason, they are driven by all kinds of irrational drives. Yugoslavia could have worked but didn’t because of these irrational drives.  

  3. Kick out the PIIGS and let them sort themselves out. The Euro as a currency will recover very well if they do that.

  4. The Europassport was just an enticement to make a union between peoples who have historically been antagonistic to each other palatable. Who wouldn’t want the option of riding the Oriental Express from Paris to Istanbul without a lot of hassles at each border crossing? Now we’re seeing the dark side of unity. Europeans are now finding that they can’t stop the movement of vagabonds and gypsies any more than they can the movement of day trippers. 

    What I really think will really kill the EU, however, is the attempt to include the Balkan nations. Afghanistan has been called “The Graveyard of Empires,” but the assassination of Archduke Franz Ferdinand in Sarajevo on 28 July 1914 led to the deaths of Prussian, Russian, Austro-Hungarian, Ottoman, and even the British and French empires, though the British and French empires didn’t die until the 1960s. The peoples of the Balkans have hated each other. If the Serbs and the Croates couldn’t get along within a united Yugoslavia, who but a European with euro signs in his eyes could think they would get along in a united Europe? 

    European unity may seem like a good idea, but there are all kinds of divisive and irrational forces at work here, as well as any common interest. 

  5. “Politicians are being led by the public, rather than vice versa. And the European street is growing increasingly anti-Europe.” – Charles Kupchan (Fellow of Council of Foreign Relations… enough said)

    Aren’t “the public” actually Europe? They represent Europe better than a few “elitist” politicians. If people want to re-establish their nationality what’s the problem?

    As far as the Euro goes, another option other than completely nationalizing a country’s currency would be to have both exist side by side – competing currencies. It would take a burden off the country and allow a more natural transition  for countries to get back on their feet. Might be difficult but a better prospect than allowing everything to go down the tubes.

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