Blog Post

Europe’s integration overdrive

May 10 is the fifth anniversary of the bailout of Greece. Set almost exactly 60 years apart from the Schuman Declaration, the events triggered by the Greek bailout have unleashed a daunting challenge to European cooperation and harmony.

By: Date: May 19, 2015 Topic: Macroeconomic policy

Sixty-five years ago on May 9, French Foreign Minister Robert Schuman read a
Declaration, triggering the birth of the European Union. Still in the shadow of
World War II, Europeans began to create, historian Tony Judt writes, “a new
and stable system of inter-state relations.” Put simply, Europeans learned
once again to work with and talk to each other. It was a magnificent
achievement.

Europeans have lost the ability to talk to each other.

May 10 is the fifth anniversary of the bailout of Greece.  Set almost exactly 60
years apart from the Schuman Declaration, the events triggered by the Greek
bailout have unleashed a daunting challenge to European cooperation and
harmony. Above all, Europeans have lost the ability to talk to each other.
For some, this is not a European problem—it is a Greek problem. Greece, so
this view goes, is sui generis, and once it is brought back into the fold, the
systems of cooperation will return to normal functioning.

That is a mistaken view. The Greek problem will not go away. But the bigger
problem is that the euro placed European integration into an unmanageable
overdrive.

The policy package proposed by Greece’s creditors, requires further austerity
and reduction of wages and social benefits. Those measures will help down
the road, but the deflationary contraction will work faster. Debt will become
harder to repay.  A debt-deflation spiral could overwhelm Greece quickly.
German Chancellor Angela Merkel has blamed her predecessor Gerhard
Schroeder for allowing Greece to enter the Eurozone.  Indeed, Greece should
never have been in the Eurozone. But the real problem lay in the construction
of the Eurozone itself.

Greece should never have been in the Eurozone.

Schuman had said: “Europe will not be made all at once, or according to a
single plan. It will be built through concrete achievements which first create a
de facto solidarity.” That philosophy was admirably embodied in the Treaty of
Rome in 1957, when European nations opened their borders to each other.
Numerous commercial relationships sprouted among the European
businesses and citizens.  Empathy for the trading partners generated a sense
of European identity. Citizens’ trust in European institutions followed the
share of intra-European trade. The Treaty of Rome succeeded because it
aligned national interests—nations and their citizens all gained through
enhanced commerce.

With the euro, national interests collided. A common monetary policy is more
favorable for some than for others. And crucially, the euro created the ever-
present risk that one nation would have to pay the bills for another. The
Treaty of Rome created a “level playing field,” in which nations participated as
equals. In the euro area, some nations are inevitably “more equal than others.”
Greece must play by the rules of its creditors—even when these are evidently
dysfunctional. Proponents insist that this will discourage others from
deviating, and fidelity to the rules will ensure a stable Eurozone. But that
equilibrium will, at best, be fragile. The problems will worsen in Greece and,
will inevitably, arise elsewhere.

The economic and political costs of breaking the Eurozone are so horrendous
that the imperfect monetary union will be held together. Instead, the cost of
the ill-judged rush to the euro and mismanagement of Greece will eventually
be a substantial forgiveness of Greek debt.

This is a good moment to step back and loosen European ties.

But this is a good moment to step back and loosen European ties. As Schuman
said, “Europe will not be built according to one plan.” The task is to create a de
facto solidarity—not to force a fragile embrace.  A new architecture should
scale back the corrosive power relationships of centralized economic
surveillance. Let nations manage their affairs according to their priorities. And
put on notice private creditors that they will bear losses for reckless lending.
The European fabric—held together by commercial ties—is fraying as
European businesses seek faster growing markets elsewhere. That fabric
could tear if political discord and economic woes persist. History and
Schuman will be watching.

This piece was also published in Handelsblatt.

Read more from Ashoka Mody:

The IMF’s big Greek mistake

Greece and the André Szasz axiom

A Schuman compact for the euro area


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Blog Post

Fiscal arithmetic and risk of sovereign insolvency

The record-high debt levels in advanced economies increase the risk of sovereign insolvency. Governments should start fiscal consolidation soon in an environment of low nominal and real interest rates and post-COVID growth.

By: Marek Dabrowski Topic: Global economy and trade, Macroeconomic policy Date: November 18, 2021
Read about event More on this topic
 

Past Event

Past Event

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Petra Geraats, Wolfgang Lemke, Francesco Papadia and Massimo Rostagno Topic: Macroeconomic policy Date: November 4, 2021
Read about event
 

Past Event

Past Event

Microchips and Europe's strategic autonomy

Per microchips ad strategic autonomy.

Speakers: Piotr Arak, Alicia García-Herrero, Jay Lewis, Stefan Mengel and Niclas Poitiers Topic: Digital economy and innovation, European governance Date: November 2, 2021
Read article
 

Blog Post

European governance

Germany’s post-pandemic current account surplus

The pandemic has increased the net lending position of the German corporate sector. By incentivising private investment, policymakers could trigger a virtuous cycle of increasing wages, decreasing corporate net lending, which would eventually lead to a reduction of the economy-wide current account surplus.

By: Lionel Guetta-Jeanrenaud and Guntram B. Wolff Topic: European governance, Macroeconomic policy Date: October 21, 2021
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Unboxing the State of the Union 2021

In this Sound of Economics Live episode, Bruegel experts look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

By: The Sound of Economics Topic: Macroeconomic policy Date: September 15, 2021
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Unboxing the State of the Union 2021

In this Sound of Economics Live episode, we look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

Speakers: Grégory Claeys, Maria Demertzis, Alicia García-Herrero and Giuseppe Porcaro Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 15, 2021
Read article More on this topic More by this author
 

Opinion

EU climate plan should involve taxing pollution, not borders

Climate change and taxes may be some of the only true certainties in life. To protect ourselves better, we should make careful choices on how they interact.

By: Rebecca Christie Topic: Green economy Date: September 6, 2021
Read article More on this topic
 

Blog Post

How have the European Central Bank’s negative rates been passed on?

Negative rate cuts are not that different from ‘standard’ rate cuts. Like them, they reduce banks’ margins, but this effect does not appear to be amplified below 0%.

By: Grégory Claeys and Lionel Guetta-Jeanrenaud Topic: Macroeconomic policy Date: July 7, 2021
Read article More on this topic More by this author
 

Blog Post

Inflation!? Germany, the euro area and the European Central Bank

There is concern in Germany about rising prices, but expectations and wage data show no sign of excess pressures; German inflation should exceed 2% to support euro-area rebalancing but is unlikely to do so on sustained basis.

By: Guntram B. Wolff Topic: Macroeconomic policy Date: June 9, 2021
Read article
 

Blog Post

European governance

Emergency Liquidity Assistance: A new lease of life or kiss of death?

Use of Emergency Liquidity Assistance to prop up euro-area banks needs to be more transparent; available evidence suggests its use has not always been within the rules.

By: Francesco Papadia and Leonardo Cadamuro Topic: European governance, Macroeconomic policy Date: May 28, 2021
Read article More by this author
 

Opinion

European governance

Europe must fix its fiscal rules

The pandemic has shown that the EU’s spending framework reflects an outdated economic orthodoxy.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: May 27, 2021
Load more posts