JOIN USHow could a group of nations that came together with such promise and commitment more than half a century ago, prepared to surrender their currencies and much of their political sovereignty to strengthen integration, now find that their union has been brought to the brink by the small state of Greece, economically and geographically one-fiftieth of Europe? And how can we now prevent a European crisis from writing a new chapter in what will be called ‘the decline of the west’?
For months we have been told that Europe’s salvation lies in austerity, in the whole Continent applying Germany’s prescription of fiscal discipline to its deficits. We have been told that if austerity does not work it is just because there is not enough of it. But when Chancellor Angela Merkel of Germany and President Nicholas Sarkozy of France met in Paris on Tuesday they had all around them evidence of what they did not expect — failing banks, waning growth and capital flight.
This confirms what many of us have argued from the outset: that Europe’s difficulties have arisen not merely from the one-dimensional issue of deficits, but from a disastrous, three-dimensional configuration that is financial and economic as well as fiscal.
These past few weeks have demonstrated that Europe has a deeply flawed banking system, a widening competitiveness gap, and a debt crisis that cannot get much better if the economy gets worse. It is an already lethal cocktail that becomes more deadly when mixed inside the euro, a currency created without the resilience to withstand difficult times and which has no structure for effective decision-making.
In the normally quiet month of August we have seen these difficulties escalate so rapidly that little now stands between Europe and a decade of low growth, high unemployment, industrial decline and popular discontent, the nearest modern economic parallel for which is the 1930s.
Some time ago I reached the conclusion that there was no solution possible within the existing euro structure. Either the euro has to be fundamentally reformed by Europe’s political leaders and the European Central Bank or it will collapse. After the events of the last few days I know for sure there is not even a chance of a middle way.
I was present at the first meeting ever held of the euro zone heads of government in October 2008, in the immediate wake of the Lehman Brothers crash. Although not a member of the euro, Britain had been invited to explain its decision to restructure and take ownership of some of Britain’s banks. I explained that Europe’s banks were under-capitalized by billions and that the prospect of them collapsing jeopardised the safety of the entire European economy — we could not run capitalism without capital.
I remember the sceptical looks when I explained that European banks were in fact more vulnerable than American banks, that they were far more highly leveraged and far more dependent on short-term wholesale funding.
In fact, half of America’s toxic sub-prime assets had been bought by reckless institutions in Europe. Worse still — as we have subsequently discovered — the greater the European banks’ problems, the poorer their insurance coverage, the worse their leverage and thus the more dangerous the risk to us all.
Yet even as the crisis grew, it was difficult to get Europe’s leaders to accept that it was anything other than an Anglo-Saxon one. By convincing themselves that the problem was simply fiscal, they have drawn back from taking proper action.
Europe’s leaders are also handcuffed by an inadequate treaty of Union, by the problem of getting a coherent response from 27 different nations, and by a rise in anti-European sentiment in their home countries (particularly in Germany), which has deterred them from sanctioning collective action beyond that which protects short-term national self-interest.
The exigencies of domestic politics have locked the euro zone into an impossible set of economic constraints — no defaults, no deficits, no stimulus and, of course, no devaluations — which mean that there can also be no banking stability, no lasting growth, no sustained job creation and no boost to competitiveness from their currency.
So there is no way out except through the biggest recapitalisation of the banks in European history and a wholesale reformation of the euro, which will require the coordination of its monetary and fiscal policy, fiscal transfers from rich to poor nations and a commitment to a common European debt facility.
(The writer was Britain’s prime minister from 2007 to 2010)