By Peter Sutherland
Published: June 29 2010
An honourable tradition of the European Union is that of turning a crisis into an opportunity. “Eurosclerosis” and budgetary squabbles in the 1980s were the precursors of the Single European Act of 1986; and the crisis of the exchange rate mechanism in 1992-1993 accelerated the creation of the European single currency. There is reason to believe that the current crisis of governance in the eurozone will follow this pattern if only because the alternative is really dreadful.
The past three months have provided painful lessons to the leaders of the eurozone about the design flaws of the single European currency. The financial package agreed in May is proof of the seriousness with which these leaders are willing to implement these lessons. But this is only part of the story. Equally significant is the willingness of the eurozone’s leaders to look again at the principles of the way the euro is run. National positions have greatly shifted over the past three months. It would be very surprising if they did not shift further over the next three months.
Without the single currency, Europe would be an economic wasteland. The cost of not having the euro would have been far greater over the past two years than the cost of having it has been over the past three months. Competitive devaluations of national currencies after the financial crisis of 2008 would have led to economic chaos incomparably worse than the turbulence we are now experiencing. The eurozone’s leaders recognise this. The task that confronts them is to ensure that the eurozone functions in such a way that the risk of disintegration is minimised and its potential advantages are exploited to the utmost. There is scope for improvement in both respects.
I am hopeful this will occur because I sense a growing acceptance among decision-makers that, for all its merits, the original system of governance for the European single currency was intellectually and politically schizophrenic. On the one hand, it represented the culmination of 40 years of integration, based on the obvious inadequacy of national procedures to confront continental and global challenges. On the other hand, it was concerned with preserving absolute national sovereignty in fiscal, budgetary and macroeconomic matters.
This latter concern was the fundamental reason why the main tool of economic governance that the single European currency gave itself, namely the “stability pact,” could never be a reliable foundation upon which to build. Its implementation was to be left to national governments and they themselves would be entitled to vote on whether they should be sanctioned for breaches of the pact. The current debt crisis is a direct result of a governance structure for the single currency that was excessively respectful of national economic sovereignty.
It is understandable that those who set up the euro wished to tread carefully over the sharing of economic sovereignty. Many probably believed that initial arrangements would be subject to refinement in the light of experience. The limitations of their approach, however, are clear. Their common membership of the single European currency entails a measure of economic sovereignty-sharing between, for example, Germany and Greece. This will not disappear because there are no political structures to manage and reflect their shared sovereignty. On the contrary, the absence of structures to deal with such problems has ensured that Greece’s eurozone partners have become ever more entangled in its difficulties. The implausible insistence that Greece’s financial problems were a matter for Greece only was the surest possible way of ensuring that they would become a pressing matter for the whole eurozone.
Herman Van Rompuy, the president of the European Council, has been charged with making recommendations to the council on the reform of the eurozone’s governance in October. It is both desirable and inevitable that his proposals will represent a substantial step forward in the integration of the European political economy. Recent experience points to a more binding surveillance of national economic, not merely budgetary, policies. A natural counterpart would be enhanced macroeconomic co-ordination within the eurozone. Even within the single European market, national economic policies have substantial repercussions for that country’s neighbours. That the eurozone has been so reluctant to set up mechanisms for managing this interdependence is a tribute to the fetish of national sovereignty rather than a reflection of reality.
I cannot share the views of those commentators, who claim it will be impossible to gain agreement for any radical reform of the euro’s governance. The German government is sometimes mentioned in this context as a potential stumbling block. But we have heard repeated assurances from Berlin that it is happy to engage in constructive negotiations with its partners on such reform. Its own proposals represent a starting point for discussion and reflection.
This is in contrast to the uncompromising rhetoric sometimes heard in Berlin earlier this year. European integration has never proceeded other than by reconciling apparently irreconcilable national views. Germany has every interest in playing its traditional central role in that process, not merely as a good neighbour in Europe, but as a matter of pressing national interest.
The writer is a former European Union commissioner