Most of the attention to the eurozone crisis in the business pages of US newspapers is on economics. Will eurozone countries default on their debt? Are the spreads on debt too high to be sustainable? Are the banks the real risk? Will the euro break up with a Greek exit? Or will it be Germany?
All good questions, but they miss the point. The real problems for the EU are political, and speak to a crisis of leadership.
The eurozone is one of the biggest economies in the world. Its economic fundamentals, taken as a whole, are arguably better than those of the United States. And its prospects are no worse than those of the United States over the long term — so long as it manages the short term effectively.
What it lacks are the institutions, mechanisms, and resources that the US government has at its disposal to stabilize the economy.
EU leaders recognize the political limits to the eurozone, but have done little to remedy them. They have at various junctures discussed, but rejected, allowing the European Central Bank to act as a lender of last resort, like the Federal Reserve; sharing responsibility for debt through some form of eurobonds, akin to Treasury bills; and creating a European Monetary Fund with serious resources, akin to a regional IMF.
Instead, they have only agreed to small steps, such as creating a Banking Resolution Facility, a fund to bail out banks, and a deposit insurance program, similar to the US Federal Deposit Insurance Corp. At the same time, European leaders have held onto counterproductive pacts, including the “Fiscal Compact,” which sets targets for debt and deficits and demands rapid and radical deficit reduction. These have only pushed Portugal, Spain, Italy, and certainly Greece deeper into recession and made it more difficult for them to repay their debt
The problem for the EU is that it has lacked the common political will to do what is necessary. Germany in particular has been a stumbling block.
Germany is the country most insistent on the need for more “political union” but it has suggested little to achieve it beyond rapid, radical deficit reduction. The moves to authoritarian extremes on the right in Hungary and on the left in Romania — which stem from similar, harsh austerity programs begun in 2008 — should be an object lesson on the problems with such policies.
But will the EU take all, or at least some, of the economic measures mentioned above? So far, there are few signs of this. Such steps would require real leadership and a lot of trust among eurozone member-states and their citizens.
It might be useful to remind Europeans, and Germans in particular, that bad things happen in bad economic times. (See World War II.) Even if rescuing member states from bad times might cost a lot today, it would be infinitely less costly than allowing economic problems to fester. Although a eurozone breakup is still a remote possibility today, who knows about tomorrow, particularly if leaders fail to take the bold measures necessary.