The world is awash in reports of a shaky euro and a sociopolitical climate that may threaten the very existence of the EU. There is talk of the collapse of the euro, social and political chaos, and general disintegration. Stock markets the world over have lost ground, and the United States and other countries are pressuring Europe to come up with a plan to solve its problems. But one has only to pay attention to see that there is constant background noise indicating that, on the contrary, European integration is moving forward.
It's true that on June 17th, Greek voters will likely empower the leftist party Syriza, along with and its outspoken young leader, Alexis Tsipras. Tsipras has called for the abandonment of the fiscal austerity plan that is causing unrest in his country, and it's widely assumed that with him in office, the European Central Bank might be forced to jettison Greece from the euro zone. If Tsipras defaults on current loan agreements, the ECG could be obliged to stem the flow of euros into Greek banks, and the Greek economy would collapse.
It's also true that banks in Spain are hemorrhaging money. Like U.S. banks in 2008, they are suffering the burst of a housing bubble during which they issued bad mortgages, and the resulting crisis has sent investor money abroad. And Spain's economy is much larger than Greece's, the fourth largest in Europe after Germany, France, and Italy.
In addition to Greece and Spain, other euro zone countries are suffering economic stagnation or contraction, especially Ireland and Portugal, and it's unclear whether even Germany and France can grow. Famed billionaire hedge fund investor George Soros warns that "political and social dynamics" in the euro zone are "working toward disintegration." Almost everyone agrees unless European leaders put a believable plan in place quickly, disaster looms.
Given more than a thousand years of strife and warfare, the economic integration of the euro zone seems a miracle, especially since the current level of fiscal integration was achieved over a relatively short 60 years. No less miraculous is the political confederation of the 27 member countries. Though 10 EU members are not part of the monetary union, the EU has developed a single market with a standardized system of laws which promotes the free movement of people, services, goods, and capital across national boundaries. Indeed, European integration is moving forward at a good pace.
Yet, throughout the non-European world, news media report angry demands for "leadership" and "decisiveness." Experts lament a "failure to act" when so much is at stake. On May 23rd, EU leaders declined to address the issue of euro bonds that would pool regional debt. For many, euro bonds seemed an obvious step toward stemming the rising tide uncertainty.
Non-Europeans fail to understand the seriousness for the euro zone countries of pooling debt. The only pro-euro bond leader with clout, France's Francois Hollande, had only been elected a few days before the May meeting. And Germany, accused of rigid narrow vision, has a lot to lose. If Germany accepts the burden of common debt, it will pay the largest part of that debt. It has reason to fear being dragged down. Europe can't find a solution that its leaders can sell back home overnight.
But there are signs of progress. Reports abound of quiet planning for the departure of Greece from the euro zone, and for the stabilization of Spanish banks. Spain is experiencing a bank crisis, not a generalized economic and political crisis like the one in Greece. We know how to prevent banks from collapsing, and there's every indication that the European Commission, the European Central Bank, and the International Monetary Fund are putting plans in place to do so. The Germany Bundesbank has likewise indicated that Greece's exit from the euro zone can be managed.
The president of the European Central Bank, Mario Draghi, has repeatedly called for further integration of euro zone fiscal controls, as has Manuel Barroso, the president of the European Commission. The latter has gone so far as to affirm that the Commission will support "full economic and monetary union in the euro area." And Germany, though staunchly opposed to euro bonds, now appears to want to move toward "more Europe, not less."
Europe is searching for a solution, and the perceived slow pace should not be construed as foot-dragging. Against accusations that it is muddling through without a strategy, it behooves fiscal experts and news commentators to notice the progress being made, in spite of the mind-boggling complexity of coming to agreement. It won't due to issue moralistic calls for Europe's leaders to rise above "narrow" national interests when the conflicts are very real and the stakes enormous. Rather it behooves us to pay attention to what EU leaders and the European private sector are really up to.
They're up to what good negotiators always do. The conflict over euro bonds is too sharp, so they have moved the debate to a proposal for combining much of the region's bad debt into a single fund that the member countries will pay off over a period of 25 years.
The idea appears to be gaining ground in Germany, which is relieved to have the pressure of euro bonds off its back; Francois Hollande may be able to sell it in France as a first step toward real European fiscal integration and the economic growth which he promised during his campaign. If Germany and France can agree, there's reason to hope that the other member countries will follow suit.
The prospective deal for pooling debt without resorting to euro bonds likely includes an extension of executive power in Brussels over fiscal targets in member countries and closer supervision of national banks. In addition, there is serious discussion of Europe-wide deposit insurance. Thus, the very same leaders who stand accused of indecisiveness appear to be seriously considering a real overhaul of the basic architecture of European governance.