The political consequences of the euro crisis

The political consequences of the euro crisis

Bulletin article
Katinka Barysch
01 October 2010

The eurozone crisis is changing the way the EU works. It is reinforcing a number of trends that had already been visible over the last decade or so: a shift towards a Union in which governments are in the driving seat, large countries matter more than small ones, and more decisions are taken by subsets of member-states. The crisis has also weakened the Franco-German alliance and revealed a growing sense of German euroscepticism. The EU that is emerging is one where leadership and solidarity – the two ingredients most needed to solve the euro crisis – seem in short supply. For as long as the euro crisis rumbles on, the Europeans will be inward looking, slow-growing and divided – and they will find it harder to play a bigger role in the world.

Throughout the euro crisis, the EU capitals have been firmly in charge, with the European Commission and Parliament playing an auxiliary role. That is perhaps inevitable in a situation where governments are putting large sums of taxpayers' money at risk. But it is remarkable that it is Germany – traditionally a strong supporter of the Brussels-based institutions – that is now spearheading this move towards greater 'inter-governmentalism'.

When Chancellor Angela Merkel is looking for a European solution to a problem, she tends to phone other EU capitals directly. And when the Germans do deals with Brussels, they prefer to work with Council President Herman Van Rompuy, not Commission President José Manuel Barroso. The Commission's rationale is that it often generates a European view that is more than the lowest common denominator among EU capitals. For example, the Commission's early contributions to the euro reform debate contained useful proposals on how to get all countries – those with big trade surpluses as well as those with big deficits – to help reduce imbalances. By contrast, Van Rompuy's task force on eurozone governance is hampered by the need to please all 27 member-states.

If the euro crisis led to a permanent weakening of the Commission, the EU would suffer. The EU needs a strong and independent Commission, to watch over the single market, enforce a tough competition policy, push for ambitious climate change policies and much besides.

The idea that all EU countries are equal has become less plausible in a Union with 27 governments around the table, where consensus is hard to achieve. The euro crisis has highlighted the tendency for the leaders of the big countries to talk first to each other. France and Germany have several times reached decisions on the bail-out packages and then presented them to the others as a fait accompli.

However, if the smaller countries struggle to be heard – let alone to set the agenda – they could become more prone to drastic action, such as vetoing EU agreements that require unanimity, or opting out of policies they dislike. If Slovakia's sudden decision not to contribute to the Greek rescue loan sets a precedent, EU decision-making will become harder.

Another group of member-states that have had limited influence during the eurozone crisis are those outside the single currency. The rescue packages for Greece and other countries that may get into trouble were negotiated and guaranteed by the 16 eurozone governments. Poland and Sweden made notional contributions but the other non-euro countries, including the UK, did not.

Merkel wants all 27 EU countries to sign up to whatever new rules and procedures emerge from current euro reform debates. But in private, German officials admit that tougher sanctions against fiscally errant governments or laborious policy co-ordination make little sense for countries that still have their own currency. And although Merkel has rejected President Sarkozy's proposal for a 'euro council' at heads-of-government level, she has conceded that summits of the eurozone leaders will convene if and when needed.

A shift of decision-making from the EU-27 to the eurozone could affect the substance of EU policy as much as its format. The existing 'euro group' of 16 finance ministers does not only discuss business strictly related to the single currency. It pre-cooks decisions on a much wider array of economic issues. Similarly, a euro council is likely to stray beyond questions of eurozone governance and into say, financial regulation, structural reforms and the single market. Since many of the EU's more pro-market countries – such as the UK, Sweden, Denmark and some Central Europeans – are outside the euro, such a two-tier set-up could lead to less liberal economic policy.

With Brussels institutions, smaller countries and non-euro participants all more or less side-lined, the Franco-German alliance – traditionally the motor of EU integration – should naturally take the lead. However, Merkel and Sarkozy neither trust each other nor share a common vision for Europe. Although they have cobbled together uneasy compromises at various times during the crisis – most recently with a joint submission to Van Rompuy's taskforce on eurozone governance – their real views on the eurozone are far apart. Sarkozy favours political discretion over the rules-and-sanctions approach advocated by Merkel. The French contribution to the euro debate has been rather muted. Sarkozy may hope that events will force the Germans to make concessions on things that France wants, such as more eurozone summits to co-ordinate economic policies.

This leaves Germany firmly in the driving seat. Yet the Germans do not seem to enjoy this leadership position. They like neither being criticised for their large trade surplus, nor having to contribute the largest share of the bail-outs. The euro crisis appears to have brought a latent sense of disillusionment and dissatisfaction with the EU – increasingly evident over the past decade – to the boil. Germany's traditionally pro-EU elites are becoming detached from the European cause. The media are writing nasty things about Brussels and other EU countries. The rock-solid cross-party consensus on EU policies has cracked, with the opposition Social Democrats refusing to vote for the eurozone bail-out package in parliament. Of all the consequences of the eurozone crisis, a strengthening of German euroscepticism may turn out to be the most alarming.

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