13 July 2012

Tony Barber: Catch-22 - The craziness of saving the euro

It is a European Catch-22, writes Barber in the FT. To believe the eurozone can be saved, you must be crazy. But if you don't try to save it, you are no less crazy – which means you must keep believing something mad.

You only have to examine how domestic political struggles are playing out in the 17 eurozone nations to appreciate how difficult it will be for them to act in unison to protect the euro... Progress on closer eurozone integration promises to be painfully slow. One reason is to be found in the distinctive responses of each national political culture to the economic and financial challenges thrown up by the crisis.

In the Netherlands, a general election in September is likely to strengthen unconventional left and rightwing forces suspicious of bailouts for southern states, opposed to rigid EU fiscal targets and reluctant to relinquish economic policy-making powers to Brussels. Given the edgy national mood, the election appears unlikely to deliver any coalition eager to exchange Dutch sovereignty for closer eurozone union.

A second example is Italy, where Mario Monti’s reforming technocratic government will bow out next year, setting the stage for an election among an unappealing collection of discredited old political parties and anti-establishment upstarts such as Beppe Grillo’s Five Star Movement. Amid morale-sapping austerity, it is questionable if Italy’s fractured political scene will produce a government able to advance reforms needed to convince northern Europeans to share a deeper union with Italy.

Then there is Portugal, where the obstacle to eurozone integration is in the form of constitutional law... Generally speaking, Portugal is dutifully swallowing the austerity medicine prescribed by its EU physicians. But a request for more help would arrive at a time when Greece’s second rescue operation is turning into a failure and the eurozone’s bailout queue is lengthening to include Cyprus and perhaps Slovenia. No one should be surprised if this were to curb northern Europe’s appetite for more intercourse with the south.

The integration of eurozone financial markets that occurred after the euro’s launch is giving way to a process of disintegration. Businesses, banks and private individuals are withdrawing money from countries once deemed reliable partners but now thought at risk of financial instability.

The restoration of the confidence and cross-border capital flows essential to a well-functioning currency union will depend on the adoption of reforms discussed at the EU summit. Yet the introduction of a banking union will be anything but easy, precisely because of Europe’s deteriorating economic conditions and the mounting disunity of the eurozone financial system.

Full article (FT subscription required)

 

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