Global Policy Forum

Eurozone: Cut to the Core

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The European project was supposed to simultaneously thrive on and instill solidarity. The current crisis has, however, put this particular bond under severe strain.  This Guardian editorial argues that the recent slew of credit rating downgrades, targeting 9 countries and, by association, the temporary financial stability fund (EFSF), is "redrawing the political map" of Europe. The downgrades divide the union into financially healthy and less healthy countries, making apparent potential divergent paths for the future. As union-wide solidarity wanes, national political problems pronounce further differences.

January 16, 2012

If the European project can be summed up in a word, that word is supposed to be solidarity. It has been evident from the beginning that this is exactly what is required to escape the eurozone's crisis. If its disparate nations could only make common commitments to creditors, take common responsibility for co-ordinating themselves and submit to common disciplines, then the emergency would be over. A shared debt burden, comparable to America's, could then be managed over the decades, not through panic measures every few weeks.

So far, however, real solidarity has been in short supply. Those few member states able to wave the chequebook have done so with one hand, whilst wielding a whip in the other; so we have had the common disciplines but none of the wider common commitments or co-ordination. The unbalanced diet of retrenchment has pushed Europe towards a new recession, yet at least it succeeded in postponing the reckoning – until now. Even before S&P's Friday night move to downgrade the credit rating of nine members at once, however, the financial demons were getting harder to hold at bay. Mario Draghi's move to deploy the full firepower of the ECB to maintain liquidity did cheer the markets, but the high spirits did not endure as they would once have done. The Greek tragedy rolls on in the direction of the first disorderly default, with a proud nation's start-stop negotiations with its creditors undermined by the pretence that the vast losses that bondholders must swallow are a purely voluntary matter. S&P's downgrading of much of the eurozone automatically called into question the creditworthiness of its bailout fund which was duly downgraded . That scotches the fond Brussels fantasy about stretching the inadequate cash by luring in overseas investors. The agency's warnings that unalloyed austerity is self-defeating only adds to the piling anxieties on the economic side.

For national leaders whose jobs depend on the opinions of national voters, however, it is now the political anxieties which are pressing in even more keenly. Every one of the stricken peripheral economies, known collectively by the mnemonic PIIGS, saw their premier or ruling party felled last year. The ravages of austerity are now evident even beyond the eurozone, witness Romanian riots, but the downgrade's real significance is in flooding political poison into the continent's heart.

The markets may have shrugged off bad news they had seen coming, but Nicolas Sarkozy cannot do the same. The French president is no doubt ruing the day he introduced the little-known concept of triple-A status into his re-election campaign, but introduce it he did, explaining in a TV interview that the rating was both a sign that France was well-managed and a passport to cheaper credit. The downgrade is thus a crushing personal blow to the reputation of a leader facing his voters in just three months. He is being squeezed between a resurgent Socialist party and Marine Le Pen, Eurosceptic daughter of the National Front's long-term leader Jean Marie, who has reheated his brew of Poujadist populism and xenophobic nationalism, and is finding plenty of takers.

A downgrade that imposes one sort of pressure in Paris presses on Berlin in an entirely different way. For the financial message about which states are more creditworthy than others also redraws the political map. Until now, north Europeans have liked to imagine that if it came to the worst and the Mediterranean south couldn't hold, a large Euro-bloc would remain centred on France and Germany. But now the prospective core is pared back to the Netherlands, Finland perhaps, and the Federal Republic itself. If France or Germany start envisioning divergent futures for themselves, their immediate interests will also diverge. Their joint leadership will then go out the window – together with any final hopes of solidarity. We are not there yet, but we are now getting perilously close. The tectonic plates are rumbling under a continent – and its currency could get crushed in the quake.


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