The EU: 2011 In Review

Summary of 2011

For the EU, any summary of the 2011 will necessarily be dominated by the sovereign debt crisis. The crisis, starting in late 2009, seems to have no end. The past year, and the year before that, has seen a string of crisis talks resulting in an ever-increasing number of initiatives: First the creation of a bailout fund (2010), then the first expansion of the fund, coupled with plans for enhancing European competitiveness and fiscal coordination, and recently a second expansion of the bailout fund, a haircut for Greek bondholders, and a guarantee of up to 30% of new bonds issued by troubled governments. Of course, let’s not forget the bailouts of themselves (for Greece, Ireland, and Portugal) and the accompanying austerity measures. The crisis is now endemic and is truly an existential crisis for the EU.

Most Unexpected Event

I guess we know better now, but if asked in December of 2010 of the likelihood of Europe’s debt crisis coming to some sort of conclusion by December 2011 – be that a break up, a default, or a viable rescue plan – I would have said that that would be that case. Alas, the duration of this crisis has demonstrated both the flaws in the design of the euro, and the shortcomings of the EU’s laborious decision making process in the face of crisis.

Person of the Year

Considering the present state of Europe, it is tempting to answer this question with: Who is the best of the worst? Berlusconi for finally quitting? I would point to former Greek PM Papandreou for his suggesting a referendum. A surprising choice perhaps, but a  referendum (aside from jeopardizing the euro…) could inject into the euro project exactly what is lacking: A sense of ownership, responsibility, and political accountability. Of course this would require that a referendum was successful, but let’s ignore that for the sake of argument.

Papandreou’s gambit highlighted the fact that the EU’s fundamental problem is political, not economical. Compare, for example, Greece with California. The sad state of California’s fiscal affairs will not bring the dollar to its knees, although California is considered the eighth largest economy in the world. On the other hand, Greece’s modest economy has shaken the EU to its core. The markets quite simply have confidence in the fact that the US government is empowered to deal with these problems, this is not the case with the EU.

If Europeans are to gain confidence in the European project, and thus grant the EU the powers necessary to deal with crisis, a sense of political ownership must be fostered. Although short term market confidence was propped up with the technocratization of political leadership in Greece and Italy, in the long term the EU must gain democratic legitimacy among its citizens to prove itself viable. In the case of Greece and Italy, bond markets in effect toppled democratically elected governments. In the long run, this will not benefit the crisis of confidence that the EU is experiencing. Perhaps Papandreou understood this better than most.

Forecast for 2012

Europe’s leaders have been reacting to, rather than preempting the euro crisis. Just enough, just in time has been the name of the game. Will this change in 2012? To look on the bright side, treaty changes are on the table for the December 9^th summit. These talks could potentially be a turning point. But then again, many previous summits have heralded as turning points, and treaty changes enhancing supranational powers will be hard to explain to skeptic constituents. Indeed, the decision to put treaty changes on the table, although necessary, could also prove to be centrifugal. What for example if some decided to move forward, while others did not? And of course, treaty changes are a lengthy affair for which Europe cannot afford to wait. As treaty changes would seem to be in the longer term, the biggest euro-question for 2012 is whether the ECB will ignore German pressure and act as a lender of last resort. Considering that the ECB is a eurozone creation, it doesn’t seem unreasonable to think that the ECB ultimately will succumb to pressure to start printing money in order to save itself from extinction.