international analysis and commentary

Euro at War


The crisis in the euro zone has the makings of a modern war which is being fought not with conventional arms but with the big guns of the financial markets.  The stakes for the countries under attack are no longer merely economic, they have become downright political, deciding the fate of governments in several countries such as Ireland, Portugal, and Greece.  In this modern war between governments and markets, Italy’s is the case that is going to make the difference.  It depends on Italy’s ability to hold out, whether the contagion stops here or also hits France:  With its banks in a vulnerable position and with an election looming, the French Government is “next in line”.

Thus it basically depends on the staying power of Italy — a major economy at the heart of the EU, certainly not peripheral to it — whether the euro survives or splits up.  And at this juncture it is no secret that Italy is too big to be able to default without damaging the entire Western economy, yet it is also too big for a purely external bailout to save it.

For all of these reasons — because we are involved precisely in a kind of war; because the Italian front is crucial; and because we have to save ourselves in order to be safe along with the others — an emergency solution can no longer be postponed:  for Italy, but for the others too.  Naturally, it must be only an emergency solution.  The British press never stops trying to teach us lessons.  Having just won Silvio Berlusconi’s head, for which it had been clamoring for ages, it has wasted no time in warning us that a technocratic government cannot sideline democracy for long, or that credibility (before the markets) cannot replace legitimacy (before the people).  Thank you, but we were aware of that without having to be told.  If an emergency solution is to work, it needs to be solid politically and rapid in terms of timing.  Its goal must be to lead Italy to a new election alive rather than dead.

So the first consideration that springs to mind is this:  For the euro zone’s major debtors the Monetary Union is no longer merely an “external constraint,” as it used to be called in the past.  It has become an “existential constraint,” which demands greater responsibility.  Why is this?  Because the greater a country’s debt and competitiveness issues, the more it is going to lose its sovereignty.  That is the warning to have emerged over the past few months.  Neither the financial markets nor creditor governments show mercy any longer in punishing conduct that “deviates” from German Europe’s written and unwritten rules:  financial stability and budget stringency.

This, however, sparks a second consideration.  The euro zone’s problems certainly are not all due to Italy, the country with the largest debt.  They are also due to Germany, the largest creditor.  Yesterday Angela Merkel had once again to deny that Berlin is eager to build a smaller euro and a two-speed monetary union.  She is probably right:  Leaving aside the Bundesbank’s propensity for a strong north European euro, there is no consistent German plan to jettison the Mediterranean debtors.  This, among other reasons, because several studies have shown that a scenario of that kind would be more costly than beneficial for the country.  Which leaves us with the basic underlying issue:  The way Germany is handling the sovereign debt crisis is forcing countries in debt to adopt greater constraints (which Angela Merkel would like to enshrine in the treaties, with automatic fines and maybe even with criteria for expulsion from the Union), yet without offering enough in terms of fiscal solidarity as an offset.  The result is that this “creditor’s dictatorship” in the euro zone is turning into a formula for recession.  And that will not make it possible to bring the debt down even if we overdose on belt-tightening.  The optimistic view is that once Germany has been reassured with regarding to the credibility of Greece, of Spain, and of Italy, it will be happier to take steps toward fiscal union, which is what we really need.  Rumors going the rounds both in Berlin and in Brussels suggest that the German Government will also be able to countenance a more expansive lending policy for the European Central Bank, which is going to have to become the “lender of last restor” sooner or later if the euro is going to work properly.  But Germany also wants changes to voting rights on the ECB board:  What it is in fact seeking is a kind of power of veto.

We shall have to wait and see in the coming months whether there is any room for a real tradeoff between budget responsibility and fiscal solidarity.  If we want Europe not to be built solely on “Berliner consensus” and if we want to strike a blow for fiscal union, then it is crucial for Italy to be in a position to pull its weight; France does not carry enough weight to do so singlehanded.  If Italy is to survive as a major economy in the euro zone, then it is going to have to adopt reforms too long postponed in any case, and it is going to have to return to economic growth.  The time for postponement is over, not because Paris, Frankfurt, Berlin, or Brussels say so but because the spread trend tells us so.  If Italy heals its own economy, it will recover – with the Monti government – its say in European affairs.  And it would be important both for us and for Europe as a whole for Italy’s voice to carry weight.  An Italy capable of engineering crucial reforms in its own house could influence the economic governance of the euro zone and add a vital issue to the agenda in Brussels. The countries of Europe have pooled certain aspects of their national sovereignty not in order to create informal “directorates” but because they believe in respected common institutions and in rules that apply to all (it is always worth remembering that both France and Germany have breached the Stability Pact in their day).

In short, we should learn a few lessons from the war that we are fighting.  Italy’s sovereignty became limited by definition the day we joined the euro.  Both for us and for the other European countries, it was a matter of voluntarily giving up our own sovereignty in favor of shared sovereignty.  As the European Court of Justice wrote in a famous ruling, that is the feature that distinguishes the European Union for any normal international treaty.  The financial crisis is further chipping away at European countries’ sovereignty, primarily in the sphere of budget policy.  The face of the EU is changing under the blows that it is taking from this crisis.  The challenge facing Italy is to avoid remaining on the sidelines.  Therein lies the difference between yielding / sharing our national sovereignty and simply losing it, period.