The eurozone will muddle through (again)

by Jean Pisani-Ferry on 4th January 2013

At the last European Council summit of 2012, politicians decided to go ahead with the banking union while ending their reflections on fiscal union they had initiated in June, a time of acute market stress. The message: banking union is needed; the rest is not.

This behaviour confirms that the eurozone has little appetite to think about its own future. Like negligent or impecunious homeowners who only contemplate repairs when the roof threatens to collapse, their overriding motivation is to avoid imminent disaster. As market expectations of break-up have abated, even a discussion on whether integration initiatives would make the currency area more resilient or more efficient seems superfluous.

There are several reasons for this stance.

First, few leaders still have ambitions for Europe. Most are disillusioned. Fighting the crisis in the eurozone has already proved divisive. The less further initiatives they take, the less they risk political problems at home.

Second, there is no agreement about what is desirable. Most observers in southern Europe and France regard systemic reforms to governance as necessary but most in Northern Europe consider the crisis has resulted from national economic policy failures.

Third, mutual trust among eurozone countries has been dented. Cultural prejudices about the lazy south and the arrogant north are back in force.

Fourth, governments in Europe have limited respect for the European institutions (with the possible exception of the European Central Bank) and they are very reluctant to transfer competences and powers to Brussels.

This does not mean that the euro will not survive. The creation of a financial firewall, the new fiscal treaty and banking union are three significant developments. At any rate, projects for a fiscal capacity, common bonds or the creation of a European treasury are still sketchy and far from being implementable. But by consciously avoiding to discuss which reforms would make participation in the euro less risky and more beneficial for all, the European leaders have missed an opportunity to signal that the harsh economic adjustment which will continue to dominate the policy agenda in 2013 is not an end in itself.

This opinion piece was published by the Financial Times in the comment section FT A-list.

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