Decisive Times? The Eurozone Crisis and the Future of Europe

1. Decisive Times? The Eurozone Crisis and the Future of Europe Dr. Andrew Cottey Department of Government University College Cork

2. Decisive Times? The Eurozone Crisis and the Future of Europe

3. Introduction • Eurozone crisis already in its third year – tendency to think in terms of a decisive resolution: • Markets force Greece out of the euro or a complete collapse of the euro. • Governments/political leaders take ‘decisive’ action to ‘save’ the euro. • Argue that the crisis is likely to be a prolonged one: • No ‘decisive’ resolution soon.

4. Unlikely and Likely Scenarios • We are not in 1939: • Historical change, democracy and interdependence (plus NATO) make a return to 1939 or 1914 (extremely) unlikely. • A complete break-up of the EU? • EU institutions and policies deeply embedded. • Spill-over from eurozone crisis may not affect other areas severely. • Political leaders aware of the risks involved.

5. Scenarios for the eurozone • Eurozone flaws well known: • Monetary union without economic convergence or full economic (and political) union. • Grexit? Not one scenario but a variety: • Markets force a ‘crash’ exit >> in absence of a national currency, markets may lack such power. • EU/ECB/Germany forces an exit >> costly/risky for EU/eurozone/Germany in terms of spillover. • Greece chooses to leave: viable (let alone attractive) terms not on offer. • >> Prolonged pain for Greece?

6. Scenarios for the eurozone • Who’s next? • A Greek exit from the euro is unlikely to draw a line under the crisis: • Economic problems of other troubled economies would remain. • Greek exit as precedent. • Further withdrawals from the euro would be probably be prolonged; even a complete break of the euro might be protracted. • The economic growth problem: • ‘Fixing’ the euro without economic growth will not solve the problem. • Economic growth will mitigate the eurozone problems.

7. Economic and Political Union? • Policy responses to eurozone crisis driving deeper integration (at 17+): • May 2010 European Financial Stabilisation Mechanism (EFSM)/European Financial Stability Facility (EFSF). • Feb 2012 European Stability Mechanism (ESM). • Economic ‘logic’ suggests further integration: • Banking union. • Fiscal union. • Political union to manage fiscal union.

8. Economic and Political Union? • Political obstacles: • Long-term trend in public and elite opinion towards euro-scepticism – re-inforced by eurozone crisis. • Germany (plus Netherlands, Finland, etc) reluctant to provide more assistance without greater surrender of sovereignty. • France (plus others) reluctant to surrender greater sovereignty • Almost no-one ready for full economic and political union. • >> prolonged treaty negotiations, a half-way house outcome and problematic ratification: • …will such an outcome be sufficient to save the euro?

9. Britain: Heading for the Exit Door? • UK = long-standing ‘reluctant European’: • Reinforced by eurozone crisis: • Misplaced British schadenfreude at eurocrisis. • Eurozone outsider (plus own economic problems) >> little part in solution to crisis. • Dec 2011 Brussels summit: PM David Cameron’s ‘veto’: 26 v 1; EU moves ahead without UK. • Budget battles. • Outcome: ‘bad will all around’?

10. Britain: Heading for the Exit Door? • UK domestic politics: • Long-term public and elite opinion shifting against EU. • Party politics: • Euroscepticisation of the Conservative Party. • Labour Party long divided on Europe. • Rise of UKIP. • Increasing interest in a one-time ‘in/out’ referendum. • The political problem: • Majority of UK public and political elite probably support EU membership, but don’t like the terms and direction of the EU. • Alternative terms unlikely to be acceptable to other member states, esp. Germany and France – and esp. with ‘bad will all around’.

11. The Other Eurozone Outsiders • Growing colder outside the eurozone core: • Core decisions increasingly taken inside the eurozone core. • Poland esp. wary of being left behind the Franco-German core. • Central and Eastern Europe wary of Russia. • The Nordic countries – not so cold in the north? • Long-standing socio-economic models. • Less vulnerable to Russia.

12. Conclusion • The term ‘crisis’ creates expectations of a decisive resolution: • but crisis may be the new normal. • Risk of a European ‘lost decade’: • Semi-permanent recession …on-going eurozone crisis …prolonged/difficult treaty negotiations and ratification. • Economic growth is the solution: ‘What we have seen in Europe is the creation of a death spiral of deficit cutting, leading to reduced growth – which leads to reduced revenues and pressure to cut deficits faster. …Co-ordinated EU fiscal consolidation looks less like economic policy co-operation and more like a suicide pact.’ Jonathan Portes, Director, UK, National Institute of Economic and Social Research and former chief economist, UK Cabinet Office (October 2012)