A man holds a banner reading in latin "how long yet", an extract of a quote by Roman philosopher Cicero during a demonstration gathering tens of thousands denouncing Hungary's new constitution, which critics say curbs democracy, while the governing centre-right government celebrated the new law at a gala event, on January 2 in Budapest. Charles Grant is the founder and director of the London-based Centre for European Reform. He was previously a journalist for the Economist, covering financial markets, the European Union, and defense. Welcome to the new year. In Europe, it doesn't look particularly promising. Even in the most optimistic scenarios for the euro and the EU economy, 2012 will be a year of austerity, recession, rising unemployment, and falling living standards. And the worse the economic situation becomes, the more Europeans are likely to turn against the euro, the EU, immigration, free trade — and each other. The eurozone crisis looks like it will last a long time. One reason is the ideological rift over economic philosophy that divides eurozone leaders. The predominant view in Germany and a few other countries is that severe curbs on public spending, combined with structural reforms designed to boost productivity, will in the long run engender growth and cure the eurozone's sickness. However, many leading economists in the Anglo-Saxon world, France, and Southern Europe think this German medicine is self-defeating. They argue that the root of the malaise is imbalances within the eurozone — not only the current account deficits of Southern Europe, but also Germany's current account surplus (almost 6 percent of GDP in 2011). The German method of tackling imbalances is to impose stringent austerity and wage cuts on the southern countries, which will then reduce imports and require less external financing. But the problem with that remedy is that it leads — at least in the short and medium terms — to shrinking output and therefore debt burdens that become unsustainable. That increases the probability of governments defaulting, thus threatening the solvency of banks across Europe. Critics of the German medicine therefore argue that structural reforms in the European periphery should be combined with efforts to boost demand, particularly in the core countries. They point out that the markets have started to worry as much about the peripheral countries' capacity to grow as their ability to repay debts. The European Union's peripheral economies could be helped not only by aid and investment from abroad, but also by a rebalancing of the German economy so that it consumes, invests, and imports more (especially from its European partners). Such arguments go down badly in many circles in Germany, especially when they come from Anglo-Saxons who, as the Germans rightly say, have mismanaged their own economies and are prone to be cavalier about inflation. Some Germans claim that too much generosity toward southerners will encourage moral hazard in the form of excessive spending. They believe that the eurozone crisis is rooted in governments' breach of EU rules on deficits. (In fact, of the five peripheral countries in trouble, only Greece seriously breached the 3 percent budget deficit limit in the years before the crisis unfolded; Portugal was slightly above 3 percent). So in 2011, the Germans pushed the European Union to adopt much stricter rules on government borrowing, through legislation, and in 2012 they are trying to enshrine similar rules in a new treaty. Many EU governments think this German economic analysis is flawed and that the new treaty requested by Chancellor Angela Merkel is pointless. But they have gone along with the German plan for greater fiscal discipline in the hope that Berlin will feel reassured that strict rules will stop the southerners from overborrowing and that it will then do whatever is necessary to save the euro. In the short term, that would mean relaxing its opposition to the European Central Bank's buying the bonds of countries in difficulty or lending to bailout funds in order to restore confidence to financial markets. In the long term it would mean mutualizing the costs of sharing a currency through a scheme for collective borrowing such as the issuance of "Eurobonds." At the start of 2012, though, Germany's leaders are far from adopting such policies. Public opinion may constrain their ability to do so, but it is hard to see how the euro can endure without them compromising on some of their economic principles. A second reason to suppose that the euro crisis will be long-lasting is the poor quality of leadership, not only in Germany but all across the EU. Where are the Churchills, Monnets, Adenauers, Giscards, Schmidts, and Delors of today? Throughout 2011, EU leaders gathered at one EU summit after another. On each occasion they unveiled a fresh "solution" to the eurozone crisis. Every time, the measures taken turned out to be too little, too late. The financial markets have started to doubt the EU's ability to sort out the problems of its currency. So have governments all over the world. The United States, China, India, and Brazil have urged Europe's leaders to act more decisively. All is not lost, yet. This is because a eurozone breakup would have a horrifying impact, destabilizing banks, threatening legal contracts, and cutting economic output. There would be a surge of capital controls, border checks, and knee-jerk protectionism. The single market and the EU might not survive in their current form. One can only imagine how, in such a climate, xenophobic populism would thrive. Therefore political leaders — even ones who are less than brilliant — have large incentives to try to hold the euro together. Ultimately, Germany's leaders will have to decide whether they want to save the euro or let it fracture. At the end of 2011, one Elysee official told me: "We think that in the last resort the Germans will try to save the euro. But we worry that by the time they move, it may be too late." Here, then — before it's too late — are the six major worries that European leaders will have to contend with in 2012: 1. The EU's global prestige is waning. This is particularly unfortunate at a time when the Arab world is in turmoil and democratization in eastern neighbors such as Ukraine is stalling. The eurozone crisis has consumed the time and energy of EU governments and also made continental leaders look incompetent. Notwithstanding military action in Libya, they have failed to make help for the emerging democracies in North Africa an urgent priority. A significant part of Europe's soft power, its attractiveness as a model, has eroded. That makes it harder for the EU to influence events in others parts of the world. The financial constraints on EU capitals have forced them to cut contributions to EU military missions, leaving operations such as those in Bosnia and the Horn of Africa desperately short of troops and equipment. In Bosnia, there are now only about 1,200 EU peacekeepers, though the military commanders of that force say they need many more troops. EU commanders also say they need a dozen ships to combat pirates off the Horn of Africa, but they currently have less than half that number. Washington is starting to see Europe less as a partner than as a liability whose missteps might drag the U.S. economy back into recession. No longer do EU leaders speak confidently of projecting power or influence, alone or with the United States. Instead, if the economic crisis worsens, the EU might even have to contend with failing states and security crises within its own boundaries. To read the rest of this article visit ForeignPolicy.com. Related NPR Stories The Other Reason Europe Is Going Broke Jan. 4, 2012 2012: A Better Year, Unless Europe's Debt Blows It Up Jan. 1, 2012 Rotterdam Port Feels Effects Of European Debt Crisis Dec. 27, 20Foreign Policy: Europe's Six Biggest Problems
Thursday 5 January 2012
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