After weeks of heated argument over the Greek debt crisis, the European Union has engineered a kind of solution – albeit a strictly limited and provisional one. The European council summit on 25-26 March 2010 in Brussels reached an agreement to offer Greece the prospect of financial help if certain conditions were fulfilled; then on 11 April, after a nervous period when the bond-markets’ pressure renewed concern over the possibility of a Greek default, Athens’ fifteen partners in the eurozone agreed a package which offers Greece a series of bilateral loans at favourable interest-rates (less than 5% over a three-year period). The total sum involved may reach as much as €30 billion ($41bn); Germany’s contribution, reflecting its proportion of the European Central Bank (ECB’s) capital, could amount to €8.4bn ($11.4bn).
The all-important financial markets seem appeased, and the EU seems able to return to business as usual. The solution is essentially the work of Germany and its chancellor, Angela Merkel. Its caution reflects both her political character and the pressures she faces from three sources: the important elections in North Rhine-Westphalia on 9 May 2010, a German public that is firm in its hostility to a bailout of Athens (“no German tax-payers’ money for Greece”), and the restrictions placed on government actions by the German constitutional court. The chancellor’s continuing doubts over large-scale action to help Greece are reflected in her spokesman’s emphasis that the eurozone plan was a stand-by facility only, which might not need to be used (see “Germany pours cold water on Greece rescue package”, Deutsche-Welle, 12 April 2010).
Yet taken together, the European agreement at the Brussels summit and now the loan-package look at first glance an effective resolution to a potentially destabilising crisis. If Greece should be in danger of becoming insolvent (an outcome almost all involved seek to avoid), the EU’s security-net of bilateral credits for Greece at market-rates will come into force; and the International Monetary Fund (IMF) with all its credentials will be on hand to make its own contribution - perhaps an additional €13bn ($20bn) - as required.
The mechanism by which Europe will provide liquidity to Greece - whose debt-burden of €300bn ($410bn) means it will have to borrow €54bn ($74bn) in 2010 just to cover its debts - involves joint advice from the European Central Bank (ECB) and the European commission, followed by an unanimous decision from the European council. But this would not be in strict terms a “bailout”. Indeed, the “bailout” question is the core of the problem; for Article 125 of the Maastricht treaty (1992) clearly stipulates that no country within the eurozone can expect financial help or money transfers from others. The council solution of 25-26 March and the package reached on 11 April respect this.
So far, so good – or at least so acceptable until the next EU member-state stumbles into a crisis comparable to the Greek one. There is, however, a huge question over the council agreement: namely, whether the EU has missed a historic opportunity to defend the euro as a political project.
The absent centre
Another solution discussed in the run-up to the summit was the idea of creating a European Monetary Fund (EMF). The moment this idea was launched – by Germany’s finance minister Wolfgang Schäuble, in an article in the Financial Times - it was stillborn (see “Why Europe’s monetary union faces its biggest crisis”, Finanial Times, 11 March 2010). In any event, it would have been too late for Greece, for this crisis. But in itself the EMF continues to be a good idea.
It would keep European crisis-management in European hands, with no interference from the United States, China or Russia (who would have a voice in any IMF initiative). If Europe wants to defend a coherent economic and social model – which it does – it might be better to think of purely European solutions for the future. The problem with the IMF is often its focus on short-term financial-sector variables in macroeconomic policies, often to the detriment of long-term goals regarding development, industrialisation, employment, or public investment.
The Latvian case is instructive here. Latvia was pushed into deepening recession by pro-cyclical measures imposed by the IMF and suffered a massive 18% annual decline in GDP. As its currency was pegged to the euro, it could not solve its problem by devaluing the currency (or has chosen to not do so); nor could it grow its way out of recession through export-led growth. Instead, schools and hospitals were closed and public-sector salaries and pensions were drastically cut; fragile social systems – and with it a fragile democracy-in-transition – were put under severe pressure (see Mats Engström, “Latvia’s crisis: the Swedish factor”, 10 June 2009).
If this policy were implemented with regard to eurozone members such as Greece or other southern European countries which risked contagion, an EU which at least claims to prize social solidarity and to seek economic convergence would be in deep trouble.
True, the European council conclusions do underscore the need for more economic coordination across Europe. But the current German government resists the concept of “economic governance”, at least in the so-called “mercantile” terms in which France advocates the idea. This is so, even though everybody knew from the beginning that the biggest deficiency of “European monetary union” is the missing economic (and fiscal) component. The council solution to the Greek drama missed the chance to complete the institutional framework for the eurozone (acknowledging along the way that Europe’s stability-and-growth pact is toothless).
In this perspective, a European Monetary Fund could be one step towards a necessary institutional completion. No doubt, it presents big problems – including who initially is to fund it. Schäuble suggested levying fines on countries that run a deficit, an approach that has already proved illusory (and how would the EU impose fines on France, for example?).
An easier solution would be to use a portion of the special drawing-rights (SDR) that European countries have pledged to the IMF. EU member-states are at present oversubscribed in the IMF; they hold 33% of the SDRs, against the US’s 17%, Japan’s 6%, China’s 3.7%, and Russia’s 2.7%. If the eurozone members were to deploy only half of their drawing-rights to constitute an EMF, the financial effect on the IMF would be small but on the eurozone it would be huge.
At least as important, the political implications of this decision for Europe as a whole would be enormous. It would resonate as a decision of independence, courage, political will, and supreme political symbolism – everything the European Union badly needs!
The German heartbeat
The country best able to orchestrate this outcome is…Germany. But it’s precisely Germany that does not want it, as little as it wants an “economic government” for Europe. The reasons for this are not just the obvious ones: well-grounded economic disputes, different economic cultures, or ideological struggles (mainly with France). Germany rarely agreed with France on content in sixty years of European integration – though the tougher the political fight, the better usually was the final political compromise. Today, the reasons for the German reluctance go deeper. Something diffuse has changed in the way that Germany runs European policy, which can be defined as a certain “Germany first” optic that is new in tone and style. Germany is no longer in the mood for and no longer capable of taking the initiative for bold European projects such as the EMF (see “Chancellor Abandons Germany's Post-War EU Policy”, SpiegelOnline, 29 March 2010).
This may be good politics for the moment. But the North Rhine-Westphalia elections will be over on 9 May 2010, and no longer a pretext to avoid decisive action. Europe, moreover, has long memories - and the memory that will linger from the Greek crisis is of a more or less isolated Germany now unwilling to fuel the European integration process in the way it once did. Fair enough! But there is still hope that some at least in Germany assess the long-term economic and political costs of its behaviour (see Judy Dempsey & Stephen Castle, “Germany's E.U. Policy Shift Reflects Generational Change”, New York Times, 12 April 2010).
From the very beginning, European integration was mainly and essentially done for and by Germany. If Germany steps out of the movie as a key-actor, the movie is finished. Or, at least, it will be very boring. And this in a world that expects more from Europe, not less! So Germany won’t for long be able to remain in denial of its European responsibility. In the meantime, it needs to be reminded that Europe is its own core interest.