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With some members inside the eurozone, and others remaining outside it, and with disparate economic interests and monetary and fiscal traditions even within the eurozone, agreement is difficult. That sets the stage for three broad scenarios, each with implications for the European and global economy, the financial and banking system, and relations between the Member States and EU institutions.
In the first scenario, a more united and homogeneous Europe emerges from the crisis, enforcing greater restrictions on Member States’ budgets to reduce apparent risk. Accompanied by a strong, broad eurozone, risk of a future currency crisis remains.
In the second scenario, a two- or three-tiered Europe includes a two-tiered euro, with the weaker countries using a separate “euro-B” currency that can float against the stronger economies’ “euro-A”. This arrangement would hold out the promise to fiscally stressed economies that, if they get their act together, they could rejoin euro-A – and do so more readily than they could from their own currency.
In the final scenario, what emerges is a more decentralised Europe, with less top-down agreement in areas beyond trade and a smaller, more homogeneous eurozone composed of the EU’s core economies. Such a construct would be far more popular with citizens who are unhappy with the accretion of EU power in Brussels and the loss of traditional sovereignty. Some current euro members – Greece (and perhaps others) – would revert to national currencies.
None of these options is easy; each entails serious difficulties and great risks. Episodic muddling through may be the best that can be hoped for.
We can expect further European turmoil – from banks, sovereign debt, and social unrest in response to even modest welfare state rollbacks – and clashing visions, within and among countries, concerning the desirability of deeper European integration. Europe has come a long way from the days when its leaders prophesied that the euro would quickly rival the dollar as a global reserve currency.
Yet no one should write off Europe. It still has great strengths, and, with sensible reforms, the EU can survive and eventually return to greater prosperity and stability. But Europe remains closer to the beginning of that process of renewal than to the end.