Elephant, meet room.
Doubt and despair returned to Europe by Tuesday despite positive reaction a day earlier to the French-German proposals to save the teetering euro. The reason? The pachyderm in the room that markets see all too clearly but which political leaders continue to pretend is a smaller creature — or not even there. That would be radical integration — deep, far-reaching and both economic and political. It is radical because it has been put off for so long but, as the markets seem to be increasingly convinced, it has become imperative for the entire European Union to get on with the process if the euro is to be saved. Indeed, the future of the entire E.U. — not just the euro — will depend on members more fully binding their fates together in a more federal Europe — or conversely finally deciding to go their own separate ways.
Tuesday morning saw French President Nicolas Sarkozy and German Chancellor Angela Merkel forced to restate their confidence in the euro-rescue plan they unveiled the previous day, even as new developments darkened the outlook heading into an E.U. crisis summit Friday. The first and worst of those came Monday evening when Standard & Poor’s issued a warning it might downgrade the credit rating of 15 E.U. nations, including euro pillars France and Germany. Though Merkel sought to minimize the importance of that threat, investors responded to the S&P warning by creating a secondary source of worry for governments: stock market declined as optimism over Monday’s French-German announcement gave way to worries that the proposals wouldn’t be enough to stem the crisis. Unlike Europe’s political leaders, investors seem to understand that each new partial yet insufficient gesture taken toward greater economic and political integration provides more proof that only a full fusing of E.U. member states can restore stability and confidence. For decades, politicians have been wasting time tuning up for that rather than actually facing the music.
The current emergency is unlikely to abate until the euro is either dead or its leading members save it by betting the entire collective farm. To that end, investors are looking for the E.U. and euro zone to put its money where its mouth is by issuing euro bonds and using the European Central Bank (ECB) to guarantee all national debt — a step strenuously resisted by Germany. As previously written here — and recently discussed at cover length in the magazine — “more Europe” appears to be the only manner of saving the euro, and giving the wider E.U. the purpose it needs to have any real future. That’s got to begin with euro nations (France and Germany at their head) embracing what they’ve been ferociously fighting off up to now: pooling their collective assets and liabilities through euro bonds as a means of stabilizing the debt of the weakest nations that have been dragging the euro under. It also involves using the ECB as the lender of last resort for all euro-zone debt. Germany in particular has been hostile to putting its own economic well-being in peril by fully tying its fate to those of Greece, Portugal and Ireland, arguing that expanding the ECB’s mandate would be both ruinous and illegal. But as Monday’s complex and nebulous plan of new treaties suggests, there are ways around organizational and legal complications if calamity is on the horizon.
The failure to do that by unleashing the ECB and issuing euro bonds suggests the political will simply isn’t there — and that safeguarding all existing national sovereignties is still viewed as too big a political risk for leaders to take — unless, perhaps, they’ve nothing left to throw at the surging euro crisis. That had better change soon, because it’s getting down to now-or-never for the euro as markets become convinced that a monetary household that won’t commit its component assets toward the stability and preservation of the collective abode doesn’t have much of a future. Who’d place much faith in a union based on vows of “for better or worse, in sickness and in health, and until death do us part — unless that requires me giving up something I don’t want to, at which point you’re on your own?”
The same could be said of the wider E.U. Because the crisis within the 17-nation euro zone is applicable in many ways to the 27-country E.U. Because the broader E.U. too is stuck in existential limbo as less-integration-keen countries like the U.K. and Poland hang back, and more federal-leaning states like France, Germany and the Netherlands forge ahead. Indeed, the creation of the euro was the first clear rupture between two internal E.U. camps—a manifestation of clashing visions and desires for Europe that have appeared and widened elsewhere. At some point before too very long, relatively euro-skeptical countries — Britain first among them — need to ask themselves what they really want from the E.U.; how that compares with the plans of most fellow members; and whether they fit in the kind of more integrated, federated Europe that will need to gel in order to make sense and carry weight in dealing with the U.S., China, India and other emerging powers. More activist E.U. members must ask themselves the same sort of questions about how far they’re really willing to go in binding themselves together, how that jibes with the nationally protective positions of less ambitious partners — and whether hesitancy for Europe to move on together means it has gone as far as it can, and therefore not have much collective future.
As Woody Allen noted in Annie Hall, relationships are like sharks in that if they don’t keep advancing, they begin to suffocate, and die. The same is true for Europe. Members need to decide whether to swim ahead as one, or break up with each country going on its own. That reflection and decisionmaking process have already begun for euro members, who are now being forced to put significantly more “union” in their stated unity of action, rather than words. Any more appearances of euro-zone leaders deciding not to decide will doubtless be interpreted by markets as a decision all the same — and one whose lack of commitment will probably seal the currency’s fate once and for all.
The elephant awaits attention.