04 January 2012

Charles Grant: Nothing to celebrate

CER's Grant writes that 2012 could be a whole lot worse than 2011 - if EU leaders don't get serious and deal with six problems. Where, he wonders, are the Churchills, Monnets, Adenauers, Giscards, Schmidts, and Delors of today?

The six major worries that European leaders will have to contend with in 2012:

1. The EU's global prestige is waning. A significant part of Europe's soft power, its attractiveness as a model, has eroded. That makes it harder for the EU to influence events in others parts of the world. Washington is starting to see Europe less as a partner than as a liability whose missteps might drag the US economy back into recession. No longer do EU leaders speak confidently of projecting power or influence, alone or with the United States. Instead, if the economic crisis worsens, the EU might even have to contend with failing states and security crises within its own boundaries.

2. Europe is fragmenting into increasing numbers of subgroups. Within the eurozone there are the AAA-rated countries that set the terms of rescue packages and the deficit countries that cannot borrow easily and must therefore swallow those terms. Since the December 2011 summit in Brussels, the EU has been heading for a rift between those countries prepared to join an intergovernmental fiscal compact (nearly all of them) and Britain (and perhaps a few others) outside it. The more divided the EU becomes, the greater the risk that its policymaking will be incoherent or ineffective, especially if the trend toward intergovernmental decision-making weakens EU institutions. The existence of a fiscal compact, with its own procedures, alongside the EU would pose serious risks for the integrity of the single market.

3. The European Commission (EC) is not what it was. The EC, the executive that initiates policy and polices the market, has been weakening vis-à-vis the Member States for 20 years, but the financial and euro crises have accelerated its decline. Merkel and French President Nicolas Sarkozy - rather than the EC - have led Europe's response to these crises. The big countries provide the money for eurozone bailouts and will not let the EC tell them what to do. They have curbed its role in the new bailout mechanisms. If the new fiscal compact takes off, it will be a more intergovernmental body - with a lesser role for the EC - than the EU.

4. Britain is moving to the margins of Europe. In Britain's nearly 40 years of EU membership, its influence has never been lower. Britain's negative attitude to European integration, a sometimes Europhobic domestic political debate, and a failure to cultivate allies in the EU have left it unpopular and isolated. Even countries that agree with the British on substantive issues such as free trade, deregulation, or Atlanticism are embarrassed to be seen as siding with them. The diplomatic disaster of the December 2011 summit, which left Britain in a minority of one, was symptomatic of Britain's waning influence.

5. France, for the first time in the history of the EU, is clearly No 2. For most of the EU's history, the Franco-German couple has provided joint leadership. The financial and eurozone crises, however, have accentuated France's relative economic weakness vis-à-vis Germany - notably its less well-capitalised banks, higher budget deficits, and poorer export performance, all of which leads to higher borrowing costs. Outwardly, Merkel and Sarkozy still get together and make decisions that the rest of the eurozone then follows. But on most of the key issues concerning the euro - should there be a new treaty, are eurobonds needed, should the European Financial Stability Facility be allowed to borrow from the European Central Bank - Germany's views prevail. Sarkozy's strategy appears to be to hug Germany close in the hope of being able to influence the details of policy and maintain the appearance of parity.

6. Germany is the unquestioned leader for the first time in the history of the EU. But whether it knows how to lead is a different matter entirely. Many Germans are uncomfortable with this role. Germany's politicians are learning very slowly, perhaps too slowly, about the responsibilities that come with leadership. Too many of them define their national interest in a relatively narrow way. Too few of them explain to the public that the euro is good for the German economy: If the currency broke up, a new deutsche mark would soar in value and damage the competiveness of German exporters. They could also point out that the euro was the price Germany paid for an easy reunification and that it has become the symbol of Germany's postwar European identity.

At the beginning of 2012, a healthy eurozone requires two things. First, it requires governments in the peripheral countries committed to structural reforms that will lay the basis for future growth. Since the end of last year, the Greeks, Irish, Italians, Portuguese, and Spaniards have all had such governments (though these governments' longevity is far from assured). Second, a healthy eurozone requires a Germany that is taking the necessary steps to ensure the euro's survival. But 20 years after the Maastricht summit that gave birth to the euro, Germany's partners are still waiting for the European giant to step up to the plate.

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© Charles Grant