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The first week of November 2011 has been a tipping point; the moment when it belatedly dawned on pundits and politicians alike that the euro crisis at heart is political – and that if it’s politics versus the markets, then politics is losing hands down for now.

From outgoing Greek Prime Minister Papandreou’s torpedoing of the G20 by his ‘bolt from the blue’ referendum call, swiftly withdrawn under outraged pressure from the Merkel-Sarkozy tandem, to Italy’s Berlusconi teetering on the edge, then announcing he will resign and abandon his attempts to cling to power, to Sarkozy  himself introducing larger than expected ‘austerity’ cuts despite the upcoming presidential election in 2012 – politics is back.

But normal EU politics this is not, nor does it seem to have much to do with democracy. The economic crisis is on its way to becoming a fully-fledged political crisis – both in individual member states and for the EU as a whole.

And it’s a triple whammy political crisis:

  • Twenty-five of the EU’s  twenty-seven member states are alienated from the decision-making process in the crisis;
  •  Neither voters nor member states are supportive of the deeper political integration that could solve the crisis (even if it could anyway happen fast enough – highly unlikely)
  •  And the increasing intrusion of the Franco-German tandem plus European Commission into not only euro member states domestic budgets but also into their domestic politics is a dangerous shift away from normal EU political behaviour – and likely to have highly negative repercussions.

Eurozone ‘the emperor has no clothes’ moment  – a member state can leave the euro

That Germany’s Chancellor Angela Merkel, and France’s President Nicolas Sarkozy are calling the shots in the attempted salvaging of the eurozone economy – with Merkel the dominant of the duo – is not new news. But the unconcealed anger of the duo, at their 11 p.m. press conference on the eve of the G20 summit in Cannes last Wednesday, as they laid into Greece was both new and marked a high stakes turning point in the EU’s management of the crisis.

The ‘Merkozy’ tandem admitted in trenchant terms that Greece could leave the euro – that Greece had to choose between leaving the eurozone, and going along with the ‘rescue and austerity’ package (painfully and inadequately stitched together at the eurozone Brussels summit on 26/27 October). As pressure on Papandreou, this worked – with a new prime minister of a national unity government due to be announced today (Wednesday 9th November). But it was the ’emperor has no clothes’ moment for the strategy of the previous two years – that euro membership was irreversible.

The markets – and the public – all now know that a member state may, with whatever ensuing chaos, leave the euro. It’s not in the treaties – but EU politics has always trumped the treaties in a crisis.

Leaving the euro means leaving the EU? Not so fast Brussels…

 Coming in behind Merkel and Sarkozy, a European Commission spokeswoman Karolina Kottova rushed to pronounce at the end of last week that “the treaties don’t foresee an exit from the euro zone” without a country also exiting the EU. Olli Rehn, European Commissioner for economic and monetary affairs, also jumped in unashamedly into Greek domestic politics, again trailing behind the ‘merkozy’ duo, calling for a national unity government.

This is political chaos. To join and stay in the EU, member states must be democracies – that means unelected European Commissioners, and even other heads of other member states, do not pronounce on member state democratic politics (unless a country is veering towards authoritarianism – in which case the EU treaty has clear procedures for this – see Article 7 of the Lisbon Treaty http://eur-lex.europa.eu/JOHtml.do?uri=OJ:C:2008:115:SOM:en:HTML).

And the Commission is quite wrong to say that in legal terms, a country that leaves the euro must leave the EU. The Lisbon Treaty says nothing about a member state leaving the euro – there is nothing in the Treaty to cover this eventuality. A member state can choose to leave the EU of its own volition, but the treaty does not say a member state can be made to leave (Article 50: “Any member state may decide to withdraw from the Union in accordance with its own constitutional requirements”).

And of course there are ten member states currently not in the euro – with the UK and Denmark with formal opt-outs from the euro, Sweden with an implicit opt-out, and the other seven meant to join when they meet the criteria. So if Greece did leave the euro, at that point it would not meet the criteria for immediately re-joining the currency, and it would surely become part of the euro ‘waiting room’ group – and there is plenty in the treaty on this group.

There is even a Treaty article explaining that the Commission should provide assistance, or in urgent cases allowing protectionism, where a non-euro EU member state is hitting major balance of payment problems – as Greece leaving the euro in crisis surely would. Article 143 of the Lisbon Treaty states: ” Where a member state [not in the euro]… is seriously threatened with difficulties as regards its balance of payments…..as a result of the type of currency at its disposal, …the Commission shall recommend to the Council the granting of mutual assistance….If the measures taken are insufficient, the Commission shall authorise the Member state [not in the euro] ..which is in difficulties to take protective measures.”

When the eurozone is fighting for its survival, it might be astute to defend the integrity of the wider EU, the single market, the collective membership of 27 member states. But the European Commission, with Merkel-Sarkozy, instead has for now chosen to open Pandora’s box even wider – not only can a member state leave the euro, the Commission might attempt to force it out of the EU at the same time.

The centralised directoire or ‘has anyone seen the Frankfurt group’?

Complaints at the dominance of the Franco-German ‘couple’ in the EU are not at all new. But the Merkel-Sarkozy performance is causing increasing concern. In the past, it was often said that the French and German positions on many issues were at opposite ends of the range of views across the 27 member states, so if there was a Franco-German compromise, this would encompass all other views.

But EU political dynamics used to be a lot more subtle and inclusive – and as a result a lot more strategic and effective – than they are in the midst of the euro crisis. In the past, the Franco-German duo would not – as Merkel-Sarkozy did in the last fortnight – smirk, and roll their eyes at an Italian leader (even at a Berlusconi), or pronounce in angry tones on Greece’s domestic politics and euro membership. In the past, Germany would reach out to dialogue and deals with the smaller member states, especially the trio of the Benelux countries (Belgium, Netherlands, Luxembourg). Coalitions – formal and informal – would be sewn together. Political leaders understood and acted to overcome dividing lines in the EU – bigger and smaller member states, northern and southern views on trade, budgets or human rights.

But today’s leaders show no awareness of this. And disgruntlement is heard from Slovakia  to Finland to the Netherlands. And while the UK has always made a strange art of being a semi-detached member state, it is not so many years since Tony Blair was pushing to make the Franco-German directoire a trio of the ‘three bigs’. But today the UK is on the margins of the EU and heading further adrift with David Cameron pronouncing on the eurozone crisis as if he were prime minister of Canada, not a full member of the EU and its single market for almost 40 years. Cameron has ensured the UK plays no serious constructive political leadership role in the EU at its moment of deepest crisis.

Meanwhile the European Commission is seen by many as having lost power as the EU enlarged (jumping from 15 to 27 member states since 2004 as it absorbed the new democracies of central and eastern Europe). In the euro crisis, the Commission has often been on the back foot, and seeming to work on parallel tracks to the Merkel-Sarkozy duo rather than coordinating closely with them. Nor has the Lisbon Treaty invention of a permanent president of the European Council – Herman van Rompuy – aided strategic leadership. Van Rompuy has been low profile and without even the resources in terms of staff that the Commission has  to draw on.

But a new grouping has suddenly emerged from the shadows since October – the Frankfurt Group http://uk.reuters.com/article/2011/11/07/us-eurozone-leadership-idUKTRE7A513B20111107 . In this  new club we find Merkel and Sarkozy, and also European Commission and Council presidents, Barroso and van Rompuy, plus a crucial non-European player, Christine Lagarde, head of the IMF, together with the head of the ECB (now Mario Draghi), chair of the euro finance ministers, Jean Claude Juncker, and European Commissioner Olli Rehn.

Whether this wider grouping will prove any more effective, strategic or faster moving than the ‘merkozy’ duo is yet to be seen. As the focus of the euro crisis moves to Italy, with its debt yields now at crisis levels, this must be in doubt. And despite the presence of the European Commission in the Frankfurter grouping, so far it doesn’t look any more likely to bring in the other 15 of the 17 euro countries into decision-making, let alone any of the non-euro ten, than before.

And the splits notably between Merkel/Germany on the one hand, and Sarkozy and others on the other hand, as to  whether to allow the ECB to step in big time as lender of last resort –  as the biggest throw of the dice to solve the financial crisis – don’t look any more like being solved by this grouping.

When will democracy – and the public – fight back?

The public cannot be kept away from a democratic say for ever.

As many commentators have said, a federal EU along the lines of the US would be much better equipped to deal with the euro crisis, than the motley collection of 17 euro countries in today’s EU – if only the publics would support such a move (neatly presented in Paul Krugman’s non-intersecting Venn diagram of economic and political euro realities http://krugman.blogs.nytimes.com/2011/09/28/the-eurovenn/). But it is clear that voters will not – the French, and Dutch ‘no’ votes to the constitutional treaty in 2005 (the forerunner to the extremely similar Lisbon treaty), and the Irish ‘no’ in 2008 to the Lisbon Treaty (before they voted under Brussels pressure a second time) show that when given a chance to express themselves, more integration is not what European voters want.

And it is ironic indeed, that it is Germany and Merkel who are resisting a more federal role for the ECB while at the same time demanding some ‘limited’ Treaty change (which will be on the table at the EU’s December summit) so that stronger sanctions can be imposed on those breaking eurozone rules. Treating European or eurozone politics as simply a case of sanctions and reproach is not a political approach that will lead to positive support for further political deepening in the EU either from member state governments or from the public. Yet it’s the approach Germany and France and the Commission are adopting today.

Meanwhile, the political and economic impacts of the EU, and especially the German, predilection for a strong anti-Keynesian approach to financial crisis is showing no sign of let up – austerity and more austerity resulting in a vicious downward spiral of lower demand leading to lower taxes and lower spending, lower growth and more cuts. None of which is even appeasing the markets. And this even as the eurozone is said to be heading straight into a double-dip recession.

How long publics – and voters – across the EU will put up with this is at best an open question. The ‘Occupy Wall Street’ protests that have produced an echo around the world including in Europe are a sign of people finding their voice, not of sinking passively into depression, unemployment and hopelessness.

Triple political whammy of Europe’s political crisis

 So there is a triple political whammy in Europe’s growing political crisis:

One, only two of the EU’s 25 member states currently feel they play a serious, political role in decision-making around the eurozone crisis that threatens the economic and political future of the EU (and with global knock-on effects).

Two, the deeper EU political integration that might help resolve the economic crisis is not supported either by most member states or by their publics, and anyway can’t happen fast enough to be relevant.

Three, the Franco-German plus Frankfurt club’s attempts to solve the crisis by imposing ever deeper austerity on struggling member states whilst starting to intervene – through high profile public statements and pressure – into other member states’ domestic politics is a combustible situation and completely at odds with how the EU should and normally does function politically.

Whether and how the eurozone will survive the current crisis also raises critical questions about the survivial of the EU itself. If the EU – with all its policies from the single market, to the Schengen passport free zone, to its attempts at common foreign policy, or cooperation on criminal and judicial affairs – is to survive, then surely those trying to solve the euro crisis had better start making a better fist of the politics.

Firstly, Merkel and Sarkozy need to start understanding or remembering how strategic political coalition-building, collaboration and decision-making works at the level of both 17 and 27 member states. Secondly, they and the Commission must remember that the EU is a collection of democracies – and start listening to and being aware of European publics instead of acting as if they don’t exist. And thirdly, the EU’s leaders had better start talking up the strength of the wider EU and all the non-euro policies it contains. After all, if the European Commission keeps saying that if a member state leaves the euro it must also leave the EU, then if the eurozone collapses, it will be left with a self-fulfilling prophecy –  that the EU collapses with the euro.

 

Kirsty Hughes is Senior Associate Fellow, Centre for International Studies, University of Oxford

 

 

 

 

 

 

 

 

 

 

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3 Comments

  1. […] I just found this fascinating article on the political impacts of the Euro Crisis:  Europe’s Political Crisis at Heart of Euro Zone Meltdown […]

  2. Lisa Herzog
    November 17, 2011 at 11:07 am — Reply

    Thanks for this interesting and illuminating article! It raises important questions, but I think that these need to be taken even further than is done in the post. How well can democratic voters deal with the growing complexities of globalized financial markets, sovereign debt, common currencies etc.? In an ideal world, wouldn’t the voters have called back their leaders from building a Eurozone in which there is a serious mismatch between the common currency and a lack of common financial policies? How well-informed are the preferences voters express when choosing one party over another? Are there ways in which voters can be enabled to take more informed decisions?
    These questions seem to become more and more important, not only for the Eurozone, but for all countries that combine a democratic constitution with a free market – in the past, this seemed to be a stable, mutually supporting arrangement, but will it still be so in the future? And if there are going to be trade-offs between capitalism and democracy, how can these be resolved?

    • November 18, 2011 at 12:49 pm — Reply

      A lot of big questions! I think the real democratic challenge is to political parties and to politicians not to the voters’ ability to understand technical issues. Where today are the major political parties in different eurozone countries, for instance, arguing that there is an alternative to the Merkel-Sarkozy led policies of full adherence to neoliberal, free market solutions to the euro crisis? There are plenty of people – experts and not – arguing against the self-defeating downward spiral of austerity, leading to low or no growth, social dislocation and greater indebtedness – and some though fewer arguing for a really major European ‘New Deal’ programme of investment so millions of youth and older unemployed are not told they are irrelevant in the face of appeasing the bond markets. But when Papandreou made his ill-fated referendum call, it was with the idea of Greeks backing the austerity approach and not with the idea of any genuine debate about alternatives.

      I remember in the 1990s – when the euro was planned but not yet introduced – in the UK there was a huge, often emotional, frequently inaccurate debate but a debate that included serious economic and political analysis of the pros and cons (and there were both, rather than just it being obvious that the next ten years would turn out as they did). And while I criticised then the febrility of the UK eurosceptic-dominated debate, I remember someone from another member state saying ‘but at least there is a real debate in the UK – more than anywhere else’. So I think voters/the wider public can engage in big debates but if elites and political parties are only offering one solution and answer, then that is the real democratic challenge.

      And one last response, I don’t think democracy and free market capitalism has always gone together that well – the decades of Thatcherism in the UK, have resulted in a much more unequal and less cohesive society, so I think it depends very much on what sort of capitalism, with what sort of regulations, social controls, society and politics.

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