The European Debt Crisis has abruptly put to the forefront the contradictions of European integration which have been simmering for decades.
To put it bluntly, Europeans don’t feel ready to jump into a federal state, but they are already economically interdependent to a point of no return.
A YouGov poll ran in early November shows that a clear majority across UK, France, Germany and Denmark believe that a collapse of the single currency would be detrimental for national economies. The most concerned (58%) are interestingly the Danish people, who in 2000 voted against the introduction of the Euro by 53%. There is a sharp contrast of opinion, however, on the bailout plans put forward. While more than half of the French and Danish are ready to foot the bill for the Eurozone, for 42% of the Brits and 57% of the Germans, spending public money to bail out other countries is plainly unacceptable.
This is not the Europe we were promised
Quite unsurprisingly, the Germans, who are ultimately likely to make the biggest financial contribution, feel indignant. The Deutsche Mark was the flag of post-war economic recovery and allowed for low inflations and high savings. Under Chancellor Gerald Schroeder (a Social Democrat) in 2001, the unions agreed to lower pay rises and bet on high productivity. They sobered up and ran a surplus while other countries began to borrow at record-low interest rates. At the same time, however, Germany benefited immensely from the single market, which eliminated the possibility for weaker economies to undercut German manufacturing by devaluating their currencies.
Meanwhile, British opposition to bailing out the Eurozone comes as no surprise, but it is interesting to point out that both Britain and Denmark are deeply concerned by a Eurozone collapse, while not being a part of it. Indeed, Denmark stands out as the most pro-bailout country. A reason for this apparent inconsistency is that Denmark, like many northern European countries, is ultimately a small economy which relies heavily on continental markets. The French, for their part, are less wary of government intervention. The crisis has offered President Sarkozy a once-in-a-decade chance to side-line the European Commission (and smaller countries) by creating new institutions dominated by a restored Franco-German duo. However, the duo’s management of the Greek bail out crisis has failed to contain the risks of contagion.
After two bailout packages, it is clear that at least 50% of Greek debt, owned by European banks (mostly French and German), will be written off. This may explain why our survey shows that an overwhelming majority of the respondents across all four countries would be happy to make Greece go back to the Drachma. Yet, at this stage this is an unlikely scenario. A Greek free-fall could trigger another “Lehman Brothers moment” and precipitate the world economy into a double-dip recession. In other words, it would be probably more costly to let Greece default disorderly outside the Eurozone than to keep it in.
Embattled leaderships
While Europeans ask for immediate solutions, the unfortunate task of government leaders is to tell them that there is no easy way out. Simply dropping Greece won’t do the trick. This is not an easy sell especially for the key figure in the crisis, the German Chancellor. In all the countries surveyed, Angela Merkel was the European leader who inspired the most confidence to make the right decisions on solving the crisis. 54% of British respondents, 56% of German respondents, 63% of French respondents and 81% of Danish respondents expressed confidence in her decisions. The British Prime Minister David Cameron, has the confidence of 63% of Danish respondents, but only 42% of the Brits.
However, there was far less confidence in the British Prime Minister amongst the two Eurozone countries surveyed – more than half of French and German respondents said they had no confidence in his decision-making. Perhaps unsurprisingly, less than 8% of respondents expressed confidence in Prime Ministers George Papandreou and Silvio Berlusconi, who have both been forced out of office.
The narrow way forward
The debt crisis leaves the Eurozone at a crossroads. If the single currency is to survive, the Eurozone will have little choice but to further integrate. Greece will need external support for many years to come and the European Central Bank will have to demonstrate its readiness to buy sovereign bonds of solvent countries currently running short of liquidity such as Italy, Spain and perhaps France. The alternative remains the collapse of the Euro, a doomsday scenario which is plainly in nobody’s interest. The crisis has already claimed the scalps of two weak European leaders, George Papandreu and Silvio Berlusconi. German voters are growing frustrated but there is still no sign of them walking out on the Euro.
In the German regional election last March, Angela Merkel’s Eurosceptic coalition partner – the Liberal Party – was dealt a terrible blow. At the recent Christian-Democrat Party Conference, Angela Merkel unveiled a federalist reform of the Eurozone, which includes tighter common policies on public spending, taxation and budgets. While this prospect is set to keep countries like the UK firmly outside the Eurozone, continental economies will have to come to terms with each other, probably without much enthusiasm. The Germans will have to spend more, the Greeks will have to cut their public debt, and the Italians will desperately need to restart economic growth after a decade of stagnation. Continental political leaders will find this even more difficult to sell to the public opinion but unfortunately, at the point where we find ourselves now, there is no third way.
