Today, I begin my new role as the head of the Institut für Makroökonomie und Konjunkturforschung (IMK). As the position does not leave time for a commitment as a senior policy fellow at ECFR, I have left the organisation after almost eight years.
Going through my notes and publications from my time at ECFR, I realise how much the European Union has changed. I joined ECFR because its director, Mark Leonard, needed an economist to work on the euro crisis. At that time, the effects of the Greek debt crisis had begun to spread across the continent, causing many observers – especially those in the United States – to predict a quick end to Europe’s project of monetary integration. ECFR’s board had come to the conclusion that a full-blown breakup of the euro would lead to the demise of the EU and would make a coherent, values-based European foreign policy all but impossible. Thus, they wanted to work on how to link analysis of the euro crisis with foreign and security policy. (A very sound analysis – as I thought then, and as I still think today.)
In fact, the financial and economic crises that began in 2007 (first the US subprime mortgage crisis, then the euro crisis) have profoundly changed not only relationships between European countries but also the political geography of Europe. In October 2012, almost four years before the unfortunate Brexit referendum, we argued in a policy brief that “no matter how the euro crisis plays out, the single market will never be the same as it was during the carefree years of the 2000s. In any of the plausible outcomes of the euro crisis, the single market will emerge in a different, diminished shape – completely shattered, reduced in depth or reduced in size.”
Our argument then was that the euro could best be saved by deepening the integration of countries that use the currency, but that this would go against the preferences of some non-euro EU members such as the United Kingdom – meaning that, at some point, these non-euro countries would leave the EU. Another alternative would be to accept the permanent threat that the euro would break up. This would make many companies (especially banks) rethink their cross-border supply chains and credit relationships, thereby damaging the single market.
Reading the paper again, I feel that these predictions were pretty accurate (even though the British decision to leave the EU probably had more tangled roots than we thought). Unfortunately, for a think-tank with a mission, predicting the future is not enough in itself. Only using predictions to change the course of history is. And, given where Europe is now, I am not sure that we have moved away from the hazardous roads we were on eight years ago.
We do not yet know whether the deepening of the eurozone has been sufficient to permanently prevent it from catastrophically breaking up
True, the worst prediction has not (yet) proven correct. The euro is still here, with all its members, and the single market is intact. De jure, the eurozone has become not shallower but, with steps forward such as an effort to establish a banking union, even deeper. De facto, it is unclear whether there has been progress. The euro crisis has shattered many cross-country supply chains due to firms precautions against a breakup of the euro, while European banks have engaged in significantly fewer cross-border activities.
Yet the single market will (barring some kind of miracle in the UK) become smaller in the near future. And Britain’s exit from the EU has been botched in a way that might poison EU-British relationships for years to come. It is thus debatable whether we really have come much closer to the goal of a values-based, efficient, and coherent European foreign and security policy.
Worse, we do not yet know whether the deepening of the eurozone – which contributed to the British feeling of alienation from the union and, certainly, distracted EU heads of state in renegotiating the UK’s position within it – has been sufficient to permanently prevent it from catastrophically breaking up. The banking union is not yet complete, with only sluggish progress towards creating a common deposit insurance scheme (which many economists believe is an important element of a level playing field for corporate and household financing across the euro area).
Moreover, some countries are at risk from a toxic mix of weak economic performance, rising populism, and potential turmoil in financial markets. Imagine that a eurosceptic party promising a referendum on membership of the euro comes close to winning an election in any of the larger euro-area countries. Given the capital controls (and withdrawal restrictions) imposed on Greece during the euro crisis, any sensible person would move her deposits abroad. If such a deposit outflow gains momentum, the country in question would face a deep recession and a banking crisis. If populists use this to point out the dangers of euro membership, depositors’ fear that the euro will break up could quickly transform into a self-fulfilling prophecy.
The EU would be completely helpless in such a situation. Guaranteeing deposits in euros would increase the incentive to vote for an exit from the euro area (as loans would be converted into a newly issued domestic currency and deposits would retain their value in euros), while denying a guarantee would increase the incentive for depositors to move their funds abroad.
The only way to neutralise this threat is to convince people of the benefits of the EU and of the euro once more. But this seems rather difficult at the moment. In some parts of the EU, economic performance remains weak and unemployment high. The prospect that anti-euro populism will disappear seems rather distant, to put it mildly.
In a true banking union, a bank takeover from another EU member state should not be a reason for concern
Even in Germany, a country that has long underlined how important the euro is for European prosperity, decision-makers do not seem to completely trust in the permanency of the currency. Behind closed doors, one argument for the proposed merger of Deutsche Bank and Commerzbank is that, without it, the former could be soon snatched up by a French or Spanish bank. In a true banking union, this should not be a reason for concern. But add the risk of a breakup of the eurozone and you can see why the German elite desperately wants to protect Deutsche Bank. Having no large bank that primarily deals in one’s currency would be unacceptable for any self-respecting country, let alone the world’s third-largest export nation.
Hence, we may still be at a very unstable point in the process of European integration. The current degree of integration may not be enough to protect the integrity of the euro from a new economic shock. Yet we do not know whether we can muster the political support and courage to move towards the kind of integration that is necessary to keep us together in a stable European structure.
While my new job means that I will become a bit more inward-looking (the IMK primarily focuses on German macroeconomic issues), I hope Germany and its EU partners will not. I am convinced that, in the twenty-first century, with the rise of new powers in Asia, no one European country is large enough to really wield influence on the global level by itself. As difficult to accept as it is, giving up sovereignty at the national level seems the only way to retain some kind of European sovereignty. And sovereignty is a precondition for living the life in Europe we want to live.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.