Should Europe loosen its ties?

Sixty-five years ago on May 9, French Foreign Minister Robert Schuman read a
Declaration, triggering the birth of the European Union. Still in the shadow of
World War II, Europeans began to create, historian Tony Judt writes, “a new
and stable system of inter-state relations.” Put simply, Europeans learned
once again to work with and talk to each other. It was a magnificent
achievement.

May 10 is the fifth anniversary of the bailout of Greece.  Set almost exactly 60
years apart from the Schuman Declaration, the events triggered by the Greek
bailout have unleashed a daunting challenge to European cooperation and
harmony. Above all, Europeans have lost the ability to talk to each other.
For some, this is not a European problem—it is a Greek problem. Greece, so
this view goes, is sui generis, and once it is brought back into the fold, the
systems of cooperation will return to normal functioning.

That is a mistaken view. The Greek problem will not go away. But the bigger
problem is that the euro placed European integration into an unmanageable
overdrive.

The policy package proposed by Greece’s creditors, requires further austerity
and reduction of wages and social benefits. Those measures will help down
the road, but the deflationary contraction will work faster. Debt will become
harder to repay.  A debt-deflation spiral could overwhelm Greece quickly.
German Chancellor Angela Merkel has blamed her predecessor Gerhard
Schroeder for allowing Greece to enter the Eurozone.  Indeed, Greece should
never have been in the Eurozone. But the real problem lay in the construction
of the Eurozone itself.

Schuman had said: “Europe will not be made all at once, or according to a
single plan. It will be built through concrete achievements which first create a
de facto solidarity.” That philosophy was admirably embodied in the Treaty of
Rome in 1957, when European nations opened their borders to each other.
Numerous commercial relationships sprouted among the European
businesses and citizens.  Empathy for the trading partners generated a sense
of European identity. Citizens’ trust in European institutions followed the
share of intra-European trade. The Treaty of Rome succeeded because it
aligned national interests—nations and their citizens all gained through
enhanced commerce.

With the euro, national interests collided. A common monetary policy is more
favorable for some than for others. And crucially, the euro created the ever-
present risk that one nation would have to pay the bills for another. The
Treaty of Rome created a “level playing field,” in which nations participated as
equals. In the euro area, some nations are inevitably “more equal than others.”
Greece must play by the rules of its creditors—even when these are evidently
dysfunctional. Proponents insist that this will discourage others from
deviating, and fidelity to the rules will ensure a stable Eurozone. But that
equilibrium will, at best, be fragile. The problems will worsen in Greece and,
will inevitably, arise elsewhere.

The economic and political costs of breaking the Eurozone are so horrendous
that the imperfect monetary union will be held together. Instead, the cost of
the ill-judged rush to the euro and mismanagement of Greece will eventually
be a substantial forgiveness of Greek debt.

But this is a good moment to step back and loosen European ties. As Schuman
said, “Europe will not be built according to one plan.” The task is to create a de
facto solidarity—not to force a fragile embrace.  A new architecture should
scale back the corrosive power relationships of centralized economic
surveillance. Let nations manage their affairs according to their priorities. And
put on notice private creditors that they will bear losses for reckless lending.
The European fabric—held together by commercial ties—is fraying as
European businesses seek faster growing markets elsewhere. That fabric
could tear if political discord and economic woes persist. History and
Schuman will be watching.

This article was originally published by Bruegel, the Brussels-based think tank. Read the article on their website here . Publication does not imply endorsement of views by the World Economic Forum.

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Author: Ashoka Mody is Charles and Marie Robertson Visiting Professor in International Economic Policy at the Woodrow Wilson School, Princeton University.

Image: European Union flags fly outside the European Commission headquarters in Brussels. UNICS REUTERS/Thierry Roge.