The business of predicting the future course of the present eurozone financial crisis is a risky one, with developments occurring with a frequency and irregularity that leave one constantly uncertain what will happen next. However, sufficient time may have passed to venture a number of tentative predictions as to what the outcome of the crisis will be.
1. The euro will survive the crisis institutionally reinforced and more integrated.
A high-ranking European Commission official observed to this writer early in the present crisis that the EU was too important to Germany’s place in the world, and the euro far too important to its economy, to be allowed to fail. This analysis rang true, and still does. Although EU leaders have integrated slowly to avoid alienating their electorates, at each turn of the crisis, enough has nonetheless been done to prevent complete collapse. No reason exists to suspect this approach will worsen in the future. Indeed, it may improve. Three positive recent pointers having been the ruling of the German Constitutional Court approving the ESM Treaty (and the ESM’s subsequent establishment), the election of a pro-European government in Holland and the ECB’s announcement of its OMT bond-buying plan. Gradually, economic institutions have been created around the euro which will make a crisis of the present kind less likely in the future – including a permanent bailout fund, and a more sophisticated and enforceable system of fiscal rules. Further eurozone integration, in the form of a banking union and greater fiscal union, is planned.
2. Ireland will receive sufficient assistance in relation to its bank debt to facilitate its return to economic independence
The markets are increasingly well-disposed to Ireland – as evidenced by the yield on government nine-year bonds dropping below 5% in late September for the first time in over two years. A crucial element in consolidating this process however, is a deal on Irish bank debt. Government European negotiations are focusing on two fronts: first, securing fulfilment of the eurozone leaders’ end-of-June commitments to examine the Irish financial sector situation “with the view of further improving the sustainability of the…adjustment programme” and to treat similar cases equally. Secondly, negotiations with the ECB on restructuring the massive promissory note obligations to IBRC (formerly Anglo). Success is not guaranteed, as the recent statement by the German, Dutch and Finnish finance ministers indicated. Yet it nonetheless seems likely for two reasons. The first is that the entire EU edifice is built on trust. Agreements tend to be adhered to, and the June commitment, divergent interpretations notwithstanding, creates moral pressure likely to translate to some form of deal. The second is simple necessity: without a deal, the bank debt burden has the potential to destroy Ireland’s recovery – and that is neither in Ireland’s interest nor that of its partners.
3. Greece will remain in the euro.
Nobody observing the present crisis can have missed the change in tone of recent messages from Berlin. Until recently, it was common to meet German officials prepared to envisage Greek exit from the eurozone, as the removal of the weakest link in a chain. In truth, this would be a recklessly high-risk strategy. The blow to market confidence if Greece exited would be such that the eurozone would likely implode. Angela Merkel has now shifted to a ‘domino’ approach to Grexit – meaning if one falls, we all fall. Merkel’s underappreciated visit to Athens is designed to demonstrate German support for continued Greek eurozone membership. Avoiding Grexit does not mean a further Greek default (or further aid) can be avoided. The impossibility of the present plan working almost guarantees that one or other will be the case.
4. The eurozone will become the new Europe
French thinker Jean Monnet once observed that Europe would be forged in crisis and would be the sum of the solutions to that crisis. The business of forging solutions to the present hydra-like financial crisis is being conducted above all in the 17-member eurozone, whose leaders now meet as a matter of course before EU summit meetings of the wider group. Cooperation begets further cooperation. All 17 states will be bound by tighter links when the crisis is over. Some will proceed to a banking union and some form of fiscal union – and will likely to comprise the organisational dynamo at the heart of Europe for the foreseeable future.
5. The UK will be confronted with at least two major European questions within a few short years
The end to the euro crisis will find the UK facing two major dilemmas. The first concerns EU membership, with the UK seemingly sliding relentlessly towards a referendum on its membership of the EU in the next parliamentary term. It is unclear if such a referendum could be won. Maximising UK influence and safeguarding the role for the City of London in the context of a Banking Union arguably require a further step – UK eurozone accession. At present politically unthinkable, not alone would UK interests nonetheless arguably be well served by a post-eurozone crisis acceptance of the euro, but Irish interests too. Particularly given the 2011 switch to referendums in the UK on such matters, however, it is probably too much to hope for.
6. Institutionally and attitudinally, the course of the present crisis will turn out to have been a steep learning process across Europe – but a learning process nonetheless.
Casting stones regarding responsibility for the eurozone crisis is a risky business. Every state arguably occupies its own glasshouse. For many, the current crisis has taught painful lessons. Ireland has learned the hard way that we cannot combine the benefits of a currency union with ‘if I have it, I’ll spend it’ fiscal policies, or with inappropriately lax levels of bank supervision. Germany, arguably attitudinally unready for the burden of becoming the leading eurozone economy, seems to be gradually learning to make the compromises necessary to do so. The eurozone member states generally have learned that monetary union cannot function without sufficient underpinning by economic institutions – and learned to make the political compromises necessary to create those institutions.
It can only be hoped, however, that the present crisis has not done too much damage to public acceptance of integration. The economic advantages of such integration seem clear – but a Ryanair-style approach to European integration – in which the public frequently feels harshly treated, but is driven by economic necessity to continue doing business – seems an insufficiently sound basis to maintain needed popular support for Europe in the long term.
(18/10/2012) Dr Gavin Barrett (School of Law, University College Dublin)