EU split over preparing for the next euro crisis

During the height of the Greek crisis last summer, five men gathered in a war room at the Finance Ministry in Athens and began poring over the outlines of a surreptitious project.

Greece was at a dangerous impasse with its creditors over a bailout, and the group needed to find a way to keep the country functioning if it were to be forced out of the euro.

The group, led by then-Finance Minister Yanis Varoufakis, came up with what he later called a “plan B” for Greece. It called for the creation of a parallel banking system, as well as the use of IOUs (I Owe You) or even a new drachma to replace the euro if Greece’s creditors cut funding to banks. There was one catch: If Greece dropped out of the currency zone, the entire European project risked succumbing to new chaos.

In the end, European leaders struck a deal to salvage Athens with a new $91 billion bailout, and the secret plan was not used. Nonetheless the episode, a stark reminder of the weaknesses of the euro and the challenges of membership in the euro zone, has created a rift among policy-makers about how to strengthen European unity to deal with future crises.

“It’s positive that the euro zone didn’t break up,” said Simon Tilford, a director at the London-based Centre for European Reform. One reason is that European leaders still have not repaired what many economists say is the euro’s chief flaw: the absence of a central fiscal authority. The region lacks a single agency, something akin to the United States Treasury, that can help manage debt liabilities among countries and make it easier to transfer financial aid to those undergoing periods of difficulty.

After six years of back-to-back crises, the region’s economic recovery continues to move at two speeds, with southern countries faring worse than countries in the north, such as Germany. Meanwhile a tide of migrants from Africa and West Asia has presented new economic and political challenges for leaders.

Europe is hardly falling apart. The Greek showdown crystalised European politicians’ thinking about the euro as an irreversible, historic project anchoring the European Union. Since summer Chancellor Angela Merkel of Germany and President Francois Hollande of France repeatedly have insisted that the euro must not only remain together but also expand through further integration. All the same, the Greek debacle also showed that leaders still are grappling with the question of how far they are willing to go to keep the currency union together.

In August, after Greece clinched the deal with its European creditors for the new bailout, the economy ministers of France and Germany called for a radical shift in the way the single currency was run. They proposed a euro-zone treasury, to be overseen by a euro-zone finance chief. That official would have a single budget and the power to harmonise and raise taxes, as well as the ability to share liabilities between countries for public finances and debts.

“Strengthening the euro is not only about the euro zone,” wrote Emmanuel Macron, France’s reformist economy minister, and Sigmar Gabriel, his German counterpart, in an open letter published in European newspapers. Mario Draghi, president of the European Central Bank, was more blunt. “Europe can only be strong if it acts in unity on the basis of solidarity and cooperation,” he said to the economic committee of the European Parliament recently.

Conflicting views

The proposal has divided political opinion in Germany, France and other countries, however, for the same reason that no one wanted to carry it out before. Under its prescriptions, countries using the euro might have to give up some national sovereignty to make the euro zone work better.

European Union leaders have postponed a discussion of the future of the euro zone until December because of conflicting views about how to go forward. France and Germany both want a stronger euro zone, but Germany favours better enforcement of existing rules governing fiscal responsibility among euro countries.

France, on the other hand, is focused on whether there should be a common budget — using taxpayer money from member countries — for the entire euro bloc.

Adding to the pressure, a slow turnaround is only now taking hold in Portugal and Spain, and in Ireland growth remains below pre-crisis levels. The fallout has damaged national balance sheets and fuelled high unemployment among millions of citizens, especially young people.

Beyond the euro zone’s borders, the crisis has cast uncertainty over the future of the European Union itself. In Britain, where the government has no intention of adopting the euro, Prime Minister David Cameron repeatedly has pointed to the euro crisis and the haphazard response of euro-zone leaders as proof of a flawed project. Conservatives in his party argue that membership in the European Union is more trouble than it’s worth.

After a majority conservative government was elected last summer, lawmakers quickly renewed the call for a referendum, in 2017 or earlier, on whether Britain should stay in the European Union, raising the spectre of the departure of one of the bloc’s biggest members.

In France the far-right National Front party, led by Marine Le Pen, has gained ground heading into the 2017 elections, partly by tapping discontent over France’s sluggish performance within the euro.

“If Le Pen gets elected, we’re going to have a very different discussion going on about Europe,” said Guntram B Wolff, the director of Bruegel, a political-and-economic-policy think tank based in Brussels.

Still, analysts say, the broader political will to strengthen the European Union, as well as the currency bloc, remains strong and is increasingly likely to prevail. The danger is that policy-makers could drag their feet and fail to muster the support to fix problems quickly, before the next crisis.