History may very well view this week’s European Summit as the moment that Europe united to overcome the crisis and forge a greater Europe, or the moment at which it gave up on the European dream..
Whatever happens at the Leaders Summit on June 28th will be the outcome of negotiations – there is no single cohesive European plan. So it is impossible to guess what they will come up with. But, in TH’s mind, the current strategy is something like this: First, stick to the script – “the euro area will not be allowed to break up.” To this end, leaders would agree that next step is to outline a banking union and some degree of fiscal federalism across the euro area.
Although these plans are long-term (say five years), the Euro area leaders are probably hoping that this pledge – like a restatement of their marriage vows – will reduce the speculation that the euro area will break up and help to anchor expectations about the viability of the Euro area and its monetary and financial institutions. Assuming that the statement does ancor expectations, then, with the pressure off, they can hope that the ongoing use of “band aid” type solutions will keep the whole thing going until 2017 comes along and the long-term fixes are finally put in place.
The problem is that, aside from the euro itself, the Euro Area has a poor record of agreement and implementation. They suffer from a huge credibility problem. And hence it’s just not clear that the required fixes will ever be in place; thus, there is no anchor to attach the band-aids to. Without credibility no temporary bailout solution will ever work. Essentially, markets will take any injection of funds that the EU finance ministers can come up with and then rather than re-investing them in problem countries like Spain, they just shift them into safe-haven markets like Germany or Switzerland. And, it’s hard not to blame them; any responsible fund manager would do the same to safeguard his clients (who are generally investors in pension and superannuation funds).
So what can be done? It seems that there are only two ways to go. Either they up the ante on the current approach through a shock and awe commitment to invest in the required euro area institutions: the banking, fiscal and improved political union (has anyone ever watched the European Parliament? It probably in need of reform too). For this reinvigorated United Europe strategy to be credible it would require constitutional changes and a series of referenda, which take time. But if leaders were really serious about their commitment to the Eurozone and their vision for Europe, then the sooner they get the nod from their constituents the better. The next summit should therefore set out a vision for fiscal and political union that will be put to national parliaments, courts and voters within the next few months. If not now, when?
The other alternative is to work on breaking up the Euro area in an orderly way. Unfortunatley the middle way — the status quo — is not only unsustainable, it is unstable.