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The Crisis of the Euro: A problem for European economy and democracy

By Vivien A. Schmidt

Every few weeks, it would seem, the markets panic over whether a Eurozone member is able to pay its debts or whether other Eurozone members are willing to bail out the country. Eurozone countries have responded by imposing fiscal austerity across the European Union, under the assumption that this is the best way to calm the markets and, ultimately, solve the Eurozone debt crisis. But will this really solve the debt crisis? And even if it does, will the Eurozone countries survive the solution?

Lurking behind the debt crisis is a growth crisis, in particular as a result of the austerity policies imposed across member-states. For Southern Europe, moreover, with the growth crisis also comes a competitiveness crisis. These latter crises are likely to fester even if the debt crisis is resolved by the 'big bazookas' of, say, the European Central Bank buying member-state debt or printing money; of the creation of some form of Eurobonds resulting from the pooling of Eurozone debt; and/or of a European Monetary Fund (EMF) made up of a greatly enlarged European Financial Stability Facility (the loan guarantee vehicle that provides funding to Ireland and Portugal) combined with the European Stability Mechanism (due to take over from the EFSF in 2013). Note that not one of these bazookas has been agreed to as yet, nor are they likely to be anytime soon except, perhaps, an EMF.

The growth and competitiveness crises for the EU are the likely result of attempts to impose one-size-fits-all budgetary austerity on all EU members. The latest such attempt is the 'fiscal compact' treaty, which largely only reinforces prior such agreements (the 'Six Pack' of last year, as well as the original Stability and Growth Pact), and subjects member-states' budgets to technocratic oversight by the EU Commission, and to significant sanctions for noncompliance. This recourse to automatic rules to reduce macroeconomic excesses is highly problematic, given the great differences in member-states' political economies.  Thinking that all countries can achieve Northern European levels of export-oriented growth if they just stick to the German 'Culture of Stability' spells a 'Culture of Decline' for much of Southern Europe.

Beyond this, the EU itself needs to do much more to help member-states in trouble. For investment, a recapitalized European Investment Bank (EIB) could be a way to jumpstart a Europe-wide investment program. Moreover, 'Social Europe' has been sorely absent in the face of a rapid increase in poverty, inequality, and unemployment. The structural funds designed to promote economic development in regions in need have gone mostly unused by the poorest of the Southern European regions. If the EU wants to win the battle of hearts and minds, it needs to demonstrate that it offers not just sticks but also carrots.

As in any reform effort, politics remains an issue for the perception of the EU's role. Euroskepticism is on the rise both in Southern Europe, where citizens see the EU as imposing unnecessarily harsh austerity to placate the north, and in Northern Europe, where citizens see the EU as imposing unnecessarily high costs to bail out the south. Moreover, populist parties—in particular, on the extreme right—have been benefiting greatly from the crisis as they shift their emphasis from anti-Muslim to anti-European politics. Not helping is the fact that the Franco-German couple (or maybe only Germany) is viewed as deciding policy for the rest of Europe.   

If the austerity rules succeed, and growth takes off, then citizens may gain renewed faith in the EU—seeing good policy 'output' via technocratic 'throughput' as a tradeoff for the lack of participatory 'input' by either national or EU parliaments. But if they don't work, yet another crisis will ensue, beyond the debt, growth, and competitiveness crises. And that is the crisis of democracy. 

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