The crisis has fundamentally transformed the economic and political landscape. Europe has been divided between creditors and debtors, also between euro countries and the rest. Divisions run deep within countries as well, as inequalities rise further and there is a growing disconnect between politics and society. The austerity forced upon debtor countries has had devastating effects: they have lost sizeable chunks of their income and unemployment has skyrocketed, especially among the young, offering the chilling prospect of a lost generation. Admittedly, those countries had lived on borrowed time and money for too long.
Some people believe or hope that the worst is now over. Markets are getting euphoric once again, countries are beginning to emerge out of painful adjustment programmes and economic recovery is getting stronger. Others, however, are less optimistic. They remind us that Europe is courting with deflation, which makes adjustment in the deficit countries and the servicing of accumulated debts even more difficult, while growth remains fragile and uneven. The large numbers of unemployed will be unable to find jobs any time soon. Public debt is now much higher than it was at the beginning of the crisis and private debt also remains very high. Europeans give the impression that they believe in miracles – even worse, they seem to rely on them.
There is much unhappiness with the state of the Union today as evidenced by the rise of Euroscepticism and anti-systemic parties in many countries. Yet, support for the euro remains high, even more so in the beleaguered countries of the periphery. It is not love for the euro, but fear of the alternative. It is the equilibrium of terror in a sense, an equilibrium that is also unstable and prone to accidents.
Europe needs a new grand bargain to get out of it. It will require a broad coalition of countries and the main political families in Europe. Structural reform and the goal of long-term fiscal consolidation need to be matched urgently with measures to boost demand and stimulate growth. Without credible answers to the questions of debt and bank recapitalisation, without a clear programme to strengthen the economic dimension of economic and monetary union, the prospects for growth – and the euro – will be uncertain, if not grim.
The European project also needs to cater more for the needs of those on the losing side of a long economic transformation that culminated in the big crisis of recent years. Europe’s conservative agenda today cannot provide an adequate response. Unless it changes, anti-systemic parties and protest movements will continue to have a field day, nationalism and populism as well.
As it stands, euro governance is neither effective nor legitimate. It needs new policy instruments, stronger common institutions, more democratic accountability and an executive able to act with discretionary power. They will provide the balance against a set of constraining rules on national policies which are necessary as well. And all that leads to a new euro treaty that should be able to face the test of democracy in member countries, on the condition that no country has the right to stop others from going ahead and that each national parliament - and/or citizens when a referendum is called - is presented with a clear choice, namely in or out. There should also be room under the bigger roof of the EU for countries not ready to take the political leap forward, as long as they accept that rights go with obligations.
If we continue with existing policies, Europe will remain weak, internally divided and inward looking: an ageing and declining continent, increasingly irrelevant in a rapidly changing world and with a highly unstable and poor neighbourhood. The challenge is not just to save the common currency. It is to provide a more effective management of interdependence, tame markets, create the conditions for sustainable development and more cohesive societies, strengthen democracy and turn regional integration once again into a positive-sum game: a tall order admittedly, but also a challenge worth striving for.
* This is a summary of the booklet The Unhappy State of the Union,made available by Policy Network.
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