The euro was saved – but is it secure? Nearly two years after Mario Draghi, the European Central Bank president, announced he would do “whatever it takes” to save the euro, the acute phase of the crisis appears over. Italian and Spanish borrowing costs are at the lowest levels since the euro’s launch. Ireland and Portugal have left bailout programmes without the safety blanket of an EU credit line. Even Greece is insisting it will survive without a third rescue when its EU programme ends later this year.
Yet many of the underlying weaknesses remain unresolved. First, the project to create a fiscal union, which many economists believe is the sine qua non for a working monetary union, remains unfinished. There is no federal eurozone budget to provide buffers for countries going through temporary economic setbacks, no commonly backed eurozone bonds to level out borrowing costs, no large-scale harmonisation of national economic policies. And countries such as Greece, Ireland, Italy and Portugal remain heavily indebted.
With the return of market calm, many of those most closely involved in the years of crisis-fighting lament that reform fatigue is not limited to bailout countries such as Greece and Portugal. At March’s EU summit in Brussels, the last before next week’s European Parliament elections, an effort by Ms Merkel to take the next step towards fiscal union – binding contracts that would harmonise fiscal reform programmes – was set aside after most other leaders complained they had already done enough.
More worrying, many in Brussels and Frankfurt fret that EU leaders are not only unwilling to continue down the road of eurozone repair but have instead gone into full reverse: governments in Ireland, Portugal and Greece are making policy decisions based on the assumption that the current market euphoria will last. As Willem Buiter, chief economist at Citigroup, said this week: “Those who say the European economy is recovering are smoking something.”
The official response is that the crisis has created a new European “architecture”, which has replaced the flawed halfway house of the Maastricht treaty that paved the way for the euro. There are new firefighting mechanisms and new rules to curb fiscal indiscipline. Still, the question on the eve of European Parliament elections is whether the monetary union is now politically sustainable.
The present arrangements look precarious. It is no longer just Greece and Ireland and Portugal that are having their budgets shaped by international monitors.
Just ask François Hollande or Matteo Renzi. Both the French president and Italian prime minister are struggling to generate economic growth, only to risk running foul of tough German-inspired budget rules adopted in the early months of the crisis.
To the federalists in Brussels, the solution is “more Europe”. And in many ways, their arguments are unassailable. If voters do not like the way Brussels is implementing budget rules, they should be able to elect new European commissioners who will do things differently. An elected, polyglot European government running the EU from Brussels would have the democratic credibility and accountability to create a fully fledged economic and monetary union.
However, at a time when anti-EU sentiment is at an all-time high in nearly every eurozone country – and anti-Brussels parties are forecast to finish first or second in next week’s vote in three of the union’s six founding members (France, Italy and the Netherlands) – nobody believes “more Europe” is a realistic solution.
So what are we left with? Has the eurozone crisis moved into a chronic phase where tough budget rules demanding debt reduction, regardless of the economic circumstances, doom some southern EU countries to austerity and anaemic growth for years? And, if so, can mainstream parties continue to hold power indefinitely, even as voters become increasingly disillusioned that their elected governments no longer fully control that most basic sovereign function, taxing and spending?
The present generation of European leaders deserves credit for holding its nerve and keeping the eurozone together with a mixture of political courage and deft improvisation. How the next crop copes with the new Europe – one in which the euro has been saved but economic stagnation and political insurgency are the order of the day – could be as bracing a challenge as the last one.