With pressure increasing daily on the European economy, Hannah Dowling looks at whether or not the EU will survive its current crisis
The EU leviathan is flirting with collapse under the weight of its self-made financial and political problems. Political stalemate has lead to an increasing threat of economic failure with substantial collateral damage to other economic zones and legitimate questions about the strength, unity and governance of the EU and the Eurozone must be asked. From its inception, there was the belief that policymakers knew how to build and run a single currency, and that members would adhere to its rules and stand shoulder to shoulder in support of one another. This crisis has erupted because of a failure to stick by these rules. Financial markets have lost confidence in the European Union’s ability to effectively deal with the fallout and are no longer willing to fund profligate governments. The consensus is that EU institutions have performed poorly, thus exacerbating the problem considerably.
This issue affects economies on a global scale, and EU leaders are coming under mounting pressure to finally deal with it. The United States, China and international financial institutions have little patience for any more dithering. There is a desperate urgency to end the crisis. Increasingly, the onus for devising a solution has come to rest upon the two behemoths of the Eurozone: Germany and France.
Chancellor Merkel of Germany is under heavy international criticism for her caution at a time when swift action or a “big bang” is what is needed, however there is heavy domestic opposition to delivering precisely what the international community wants. She is in a difficult position. Key policy differences between France’s President Sarkozy and Merkel have not helped. Sarzoky’s blunt and dynamic manner differs to the guarded and less exuberant mannerisms of Dr Merkel. Their lack of chemistry has contributed to the muddling that has characterised much of the EU’s response to the crisis.
In sharp contrast, the United Kingdom and United States governments’ decisive action in 2008 effectively dealt with matters in a way the EU has not when it failed to recognise and tackle sovereign debt and bank balance sheets in a realistic way. Economics Professor Gary O’Callahan wrote in the Irish Independent that benefits from membership in a common currency include market credibility in the system. This advantage has been lost as “Eurozone leaders have consistently tried to defy markets and have wasted a lot of time and resources on the wrong approach.”
It is not surprising that the situation was used as a pretext in the UK for a motion to hold a referendum on whether or not to leave the European Union. The UK’s participation in the EU has always been a divisive issue, both within Westminster and the population at large, and the current circumstances have allowed politicians in the UK to question the strength and merits of remaining within the European project. Demands from within the Conservative party, which has a high number of eurosceptic MPs, to vote for such a proposal is putting increased strain on David Cameron’s government. Their coalition partners, the Liberal Democrats, as well as the Labour party, believe that such a concept would stifle Britain’s economic growth and weaken the UK. The Chief Secretary to the Treasury, Danny Alexander MP, said of the idea that “sadly eurosceptics on the left and right fail to understand Winston Churchill’s central insight that sharing sovereignty strengthens influence and isolation weakens us”. The motion was defeated early last week with eighty-one Conservative ‘rebels’ defying the party line to vote in favour. Demands for a referendum arose, not because of a groundswell of opinion, but because of a new procedure that allows a debate to take place in the Commons if it is backed by 100,000 votes in a petition. As the UK electorate is forty-two million, this is not a high hurdle. Most X Factor contestants get that many votes every Saturday night.
The question of a Euro collapse is a dark cloud hanging over Europe, and many Eurozone politicians view the continuation of the Euro and the continuity of the EU as one. Regardless of the defence that the single market was in existence before the Euro, there is the probable result that a return to individual currencies would lead to increased and prolonged recessions in many of these countries and place the Union itself under severe strain. The break-up of the Eurozone would only occur if France, Germany and Italy left the common currency union, but even the cost to them is too great to contemplate.
If the Eurozone is to survive, member countries need to align their economies more closely. Effective monetary union requires effective political union. Without these, economies cannot be run at parallel lines and long-term currency stability is all but impossible.