Decision time in Europe
CONFIRMATION THAT the main European economies are once again in recession only adds to the difficulties political leaders of the euro zone face over the next four months in convincing their voters and the markets they can save the single currency from fragmentation or break-up. That they will be decisive months is widely acknowledged.
And that bold political action is required to tackle these economic problems is much more understood. The trouble remains for politicians that they themselves now know better what to do to save the euro but don’t yet know how to get re-elected after they do it.
This political source of economic uncertainty is broadly understood both by voters and markets. It can only be resolved by the leaders themselves, acting at domestic and European levels. They have in fact made substantial progress on setting the agenda for their negotiations. The European Council at the end of June agreed to break the connection between banking and sovereign debt and committed to creating a banking union with appropriate regulation. They also endorsed negotiation of a potentially radical road map to create a “genuine economic and monetary union”, including more common budgets and economic policies, potential treaty change and strengthened democratic legitimacy and accountability, by December next.
The current centre-right tilt of European politics has ensured budgetary consolidation and structural reform are tackled ahead of economic growth, a priority reinforced by the greater power indebtedness confers on northern creditors over southern borrowers. The latest indications of recession sharply remind all concerned that such measures risk misdiagnosing the problem. Without economic expansion and employment creation it will be impossible for those economies to recover and for the most indebted ones there must be a realistic prospect of reducing this burden first. The sheer interdependence revealed by the crisis ensures such relief will benefit all.
Ireland exemplifies this problem and faces an onerous negotiation to reduce sovereign debt in coming months. But that task cannot be separated from the wider need to formulate and articulate Irish preferences on the future shape of the euro zone and the European Union as a whole. Deepening economic integration within the euro zone raises complex problems about pooling budgetary and taxation capacity, demanding informed and attentive public and political debate on what suits Ireland’s interests best. The overall political contours of a system running deeper and faster within the euro zone than outside it open up the prospect of a two-speed Europe. Combined with political changes in the United Kingdom’s approach to Europe this will present major difficulties in coordinating British-Irish relations, to which the Government has given such marked priority.
Political leaders should not be intimidated from expressing bolder visions by voter and market uncertainties. Absence of leadership creates uncertainty while its assertion will help re-create trust.