Euro crisis entering dangerous third phase
September 28th, 2012
03:12 PM ET

Euro crisis entering dangerous third phase

By Nicholas Walton, Special to CNN

Editor's note: Nicholas Walton is the communications director of the European Council on Foreign Relations. The views expressed are his own.

From outside, Europe looks the same as ever – more riots on the streets of sunny Southern European countries and a niggling sense that the Old Continent is still failing to face up to an existential crisis. From inside, the situation is certainly more complicated – and potentially far scarier. Not only is the crisis still very much alive, but it seems to have moved into a third and very worrying phase.

First we had a banking crisis; then we added a sovereign debt crisis; now we also have a political crisis, and one that strikes to the heart of what the European Union was designed to achieve.

Think back a few years to a time when Greeks and Spaniards (not to mention the Portuguese and many, many others) did not routinely head to the streets or go out on strike to protest against the personal disasters that many of them now face. Back then, the European Union brought the promise of a new model of international association that swapped the primacy of the nation state, via the surrender of a fair chunk of sovereignty, for a new way of doing things. At its core were the largest single market in the world and a belief in liberal democracy that united the people of (eventually) 27 member states, with others drawn in by the EU’s powerful magnetic field. The euro was another plank in the long road towards integration, and the Schengen zone of passport-free travel was another proud boast. Then the crisis hit, and the “project” has been creaking ever since.

At this very moment the new political phase of crisis is centered on Spain, where unemployment is running at 25 percent and the government of Mariano Rajoy has just unveiled a new austerity budget that is guaranteed to bring more angry and desperate people out on the streets. Rajoy is playing a political game, needing but so far unwilling to ask for the money on offer from the European Central Bank, which would give the impression that outsiders (the EU and IMF) are imposing further austerity on Spain. The trouble is, as David Gardner writes in the Financial Times, “austerity is politically toxic and intrinsically centrifugal.”

The most worrying manifestation of this is in heavily indebted Catalonia, the government of which has called a snap election that is widely seen as a referendum on independence from Madrid (although not one that is likely to succeed). Catalonia accounts for 30 percent of Spanish exports yet has only 15 percent of its population, and many Catalans feel they hand over a disproportionate amount of their cash to Madrid. There are arguments, of course, on the other side, but the situation in Catalonia is emblematic of the political divisions that the crisis is throwing up all across Europe, and that are only going to be exacerbated by the continuing woes of the euro.

The political fault line between the Germans (whose media happily draws a picture of Southern Europeans as feckless wasters) and the troubled economies of the South (where memories of the Nazis have been dredged up) is well known. In Britain, domestic austerity, a faltering coalition government and the unedifying view of the Eurozone’s struggles have all contributed to a resurgence of popular euroscepticism. From Finland to the Netherlands, political capital has been made by those who decry the implications of the EU project and the crisis that the euro has found itself in.

What makes this a new political phase in the crisis is not just this rise in regional and inter-national antipathy, or the continued protests on the streets of Madrid and Athens. Back in the summer, Mario Draghi, the president of the European Central Bank, promised to do “whatever it takes” to save the euro. This backstop position brought temporary relief in the bond markets, but as Rajoy is demonstrating in Spain, it is not the sudden cure that many hoped it would be. It does, however, represent the first concrete step towards further integration as the cure for the ills of the euro. Whether it is premature or not, the focus of the debate is changing from how the fire can be extinguished to how the burning house needs to be redesigned (my colleague Ulrike Guérot argues that even in Berlin the big question is not about booting the naughty Greeks out, but how “political union” is to be achieved). Banking union and the mutualization of debt are already firmly on the table. But this brings a whole new set of problems that might be even more dangerous for the grand EU project.

For a start this makes the prospect of a “multispeed Europe” even more likely, casting those that cannot keep up into an outer orbit along with those (like the UK) that will not. It makes the euro more sustainable in the short run, of course, but without either real reform and convergence or continued massive transfers between states based on a genuine shared identity, how long will this last? Massachusetts to Arkansas is not the same as Germany to Portugal. Will Greece, after all its current pain, really be a euro member ten years from now? The perennial question of the “democratic deficit” at the heart of Europe, already thrown into sharp relief by technocratic governments in Greece and Italy, will only become sharper with further pooling of sovereignty.

All of this may also have the effect of exacerbating ill feeling between nations, and fueling regional aspirations of breaking free of the orbit of current nation states. Whether it was exhaustion, wishful thinking or just another summer holiday season in Europe, recent events have led to whispers that the worst of the crisis is over and the sunlit uplands of further EU integration are now visible. But such whispers are naïve. The first two phases remain unresolved, and the third phase of the crisis is upon us, bringing even more challenges to the whole EU project.

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Topics: Economy • Europe • Greece • Spain

soundoff (21 Responses)
  1. Quigley

    When are the Europeans going to wise up? As Napoleon Bonaparte, Adolf Hitler and later the Communists of Eastern Europe have already learned, unifying Europe is not nor ever was a good idea, period!

    September 28, 2012 at 7:24 pm | Reply
    • Isaac

      Why?

      September 28, 2012 at 10:23 pm | Reply
      • Tonyh110

        go and live there you'll get your answer

        October 1, 2012 at 3:53 pm |
  2. JAL

    Dear author: Tell us more about the Eurozone crisis, while you sit at Starbucks giddy from your last genius epiphany.

    September 29, 2012 at 8:11 am | Reply
    • JAL

      Here is a better headline: Analysis paralysis and the rise of new dictatorships in Europe.

      September 29, 2012 at 9:38 am | Reply
      • j. von hettlingen

        The core of evil in the Eurocrisis was the flouting of the Maastrich rule. Countries using the euro are not allowed to have an annual deficit of more than 3% of GDP, but several countries have failed to keep to that rule in recent years.

        September 30, 2012 at 4:31 pm |
  3. deniz boro

    Just keep in mind that only the Southern members which based its economies on agriculture, tourism and somewhat maritime started this circle. Global crises did not help the tourism and maritime sector whereas weather was not kind on farmers.
    But the reason I comment is the new fuel raise in Turkey as of today. As a country we can now boast of being the TOP PAYİING nation on world for transportation. Turkey loves to be on the top of the list, be it on the European Song Contest. We were close but never achieved that position in communication technologies such as telephone.(Mind you smoke signaling is permitted with no taxes but barbeque is banned in urban areas now)
    This increase in fuel prices was explained by our genious of a Minister Mr. Babacan as the necessary measures to be taken to ensure the stability and wellfare of our economy. I looke up to Babacan for bringing us safe and secure out of the LAST global crises. However I still wander how people can trade with high travel and communication costs.

    September 29, 2012 at 8:37 pm | Reply
    • deniz boro

      HEAR, HEAR

      April 23, 2013 at 9:07 pm | Reply
  4. deniz boro

    Just keep in mind that only the Southern members which based its economies on agriculture, tourism and somewhat maritime started this circle. Global crises did not help the tourism and maritime sector whereas weather was not kind on farmers.
    But the reason I comment is the new fuel raise in Turkey as of today. As a country we can now boast of being the TOP PAYİING nation on world for transportation. We were close but never achieved that position in communication technologies such as telephone.( Mind you smoke signaling is permitted with no taxes but barbeque is banned in urban areas now)
    This increase in fuel prices was explained by our genious of a Minister Mr. Babacan as the necessary measures to be taken to ensure the stability and wellfare of our economy. I looke up to Babacan for bringing us safe and secure out of the LAST global crises. However I still wander how people can trade with high travel and communication costs.

    September 29, 2012 at 8:38 pm | Reply
  5. deniz boro

    On the sunny side...When crop yield is down food producers get better pay for the crop at hand. Simply Demand/ Supply. When economic activity is low, there is more unemployment, higher demand on consumables and lower demand on "SAY EXTRAS". Such as cars, newer cell phones and such. Before the circle is over ma'be methinks Southern regions may be richer tan'the North.
    When you get a region of the size of Eurupe, and you can not forsee for at least 10 years I can only call it lack of planning.

    September 29, 2012 at 8:52 pm | Reply
  6. deniz boro

    If you have a sweat tooth, you should get on feeding on pudding. Otherwise your DISH may be taken from you. How about some sticky Turkish deleight.

    September 29, 2012 at 9:42 pm | Reply
  7. deniz boro

    Do not put all your sweats in the same basket.

    September 29, 2012 at 10:15 pm | Reply
  8. Ferhat Balkan

    The European Spring.

    September 30, 2012 at 12:33 am | Reply
  9. krm1007 ©™

    The Indian Debacle could overshadow the European crisis. GDP that has dropped off the cliff (4% est), budget deficits, collapse of Indian rupiah, rampant poverty, unemployment, FDI reversal, companies leaving town are some of the disastrous events that are threatening the Indian state. The downward spiralling is so severe that the Indian government has been unable to control it. Even the Americans have been unable to help and several trips by the treasury secretary were not helpful. This also has security repercussions for India and US defense secretary and secretary of state have flown in to counsel India on how to protect its borders with the help of Israel/IDF. Rumors have it that the breakup of India along the lines of Soviet Union is a very plausible scenario that I am sure intelligence agencies all over the world are factoring in their geopolitical stress tests.

    September 30, 2012 at 11:56 am | Reply
  10. brjnica

    The Euro Crisis Explained To Grannies: For a very simple (and funny) explanation for the euro crisis, just write on your search engine: wordpress blog The euro crisis explained to grannies

    September 30, 2012 at 8:43 pm | Reply
  11. Aristocles

    Europe can do well united or divided into nation-states. The problem is this quasi-unity they have in the EU. The states have given up too much sovereignty to control their own destiny, but have not given up enough sovereignty for a central power to guide them out of this situation. As such, they are stuck in a sort of economic, social, and political limbo, unable to advance.

    October 2, 2012 at 5:48 am | Reply
  12. deniz boro

    I than did not know of the new version of financing. I kind of thought that our Minister of Finan ce worked out miricles. Well anyone could do that on interest free money where no financial but other INTERESTS are paid.

    May 31, 2013 at 6:40 pm | Reply

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