Tough Times for the Eurozone, Questions that could reshape a worried Europe in 2017

Tough Times for the Eurozone

In the ending part of the year 2016, it was forecast that the looming European banking crisis, with the anxiety centering on two banks in particular—Germany’s Deutsche Bank AG (DB) and Italy’s Banca Monte dei Paschi di Siena—will give rise to a confrontation between Italy and Germany and the European Union in 2017. And, it seems that the groundwork for this sort of confrontation has already been laid because if Germany bails out Deutsche Bank and continues to refuse a comprehensive rescue for the Italian banking system, southern European countries like Italy and Greece would rightly question why there is one rule for Germany and another for everyone else.

In December 2016, two members of the European Parliament belonging to Italy’s populist ‘Europe of Nations and Freedom’ group wrote to the European Central Bank (ECB) a letter wherein they sought an explanation on the “widening balance divergences between individual countries since the 2008 crisis,” and also asked as to “how the balances would, technically, be settled, especially those in net debtor countries, should a Member State participating in the system decide to quit the single currency.

This is an unprecedented development as no member of the European Parliament has ever inquired about the ways and means to leave the eurozone and also about the future of euro. President of the ECB, Mario Draghi, responded through a letter by first explaining the reasons for imbalances and how the eurozone payment system works. He concluded by saying, “Any country leaving the eurozone would need to settle its claims or debts with the bloc’s payments system before severing ties … [i]f a country were to leave the Eurosystem, its national central bank’s claims on or liabilities to the ECB would need to be settled in full.”

For the Italians, this issue has more to do with national politics than the European Union. Italy will hold general elections in 2017 or 2018. Its internal debate regarding EU membership will be central to its dialogue with the EU. The power dynamics between the two entities will continue to unfold throughout the year.

Power is a key concept in geopolitics. The extent to which a country has, or lacks, power dictates which deals or treaties can be made, broken or left in place. To reverse a deal, power is needed. Understanding how you acquire power is key to assessing whether change is possible. Deals, in the form of treaties, are often signed after wars are fought. These deals are difficult, if not impossible, to reverse because the road to reaching such a deal entails extremely high costs, including loss of life and a country’s physical destruction. Other deals seem easier to dismantle, as they appear to be mostly political.

The European Union is essentially a deal between nation-states to form a union with the hope that peace and prosperity would result. Political cooperation, first inspired by fear of renewed war and later by hope for growth, led to the bloc’s formation. The fear of renewed war led to the formation of the European Coal and Steel Community through the Paris Treaty in 1951. Hope for growth led to the Maastricht Treaty, signed in 1992 by the members of the European Community. This treaty led to the EU’s founding and the creation of the eurozone. Both treaties aimed to create a level of peace and prosperity that member states did not have the power to produce on their own. They feared renewed conflict, as they remembered the impact of World War II on the continent. They also understood they could not afford massive destruction and rebuilding efforts for a third time.

But in the European Union’s formation, Europe didn’t experience anything comparable to the Battle of Gettysburg during the American Civil War, where the Union Army fought and won against the Confederate Army. The European Union’s founding was more a result of political negotiations than a military battle. The EU was not an ideal solution for the Europeans – but it was seen by European countries and their political leadership at the time as an opportunity for growth.

Today, neither prosperity nor peace is guaranteed through European Union membership. The days of European politicians promising prosperity through integration ended with the 2008 financial crisis. The refugee crisis and terrorist attacks in Europe have threatened to disrupt peace. The EU couldn’t effectively address either crisis and citizens started questioning whether membership was worth the cost. With public discontent growing, populism and nationalism are on the rise. Anti-establishment, populist parties have won seats not only in national parliaments but also in the European Parliament. A significant number of the politicians from these parties represent countries that have experienced severe effects from the economic crisis – such as Italy, Greece and Spain – or countries that have seen a dramatic rise in Euroscepticism in the last few years – such as the United Kingdom.

Draghi’s response to the Italian MEPs’ question marked one of the first instances in which a European authority acknowledged parameters for leaving the bloc. In fact, the European treaty does not have a provision detailing how a member would exit the eurozone, and this is not a mere oversight. There are no norms or procedures that outline how a withdrawal would proceed. The monetary union was considered irrevocable and irreversible. When the Maastricht Treaty was signed, member states thought it was inconceivable that any countries would want to withdraw from the eurozone. Including such a clause in the treaty would have meant acknowledging that membership may have negative effects on states in the future. Taking such a possibility into account would have implied that prosperity was not a given and undermined the promise and purpose of the treaty. Countries would have been forced to question their transfer of powers to the bloc.

But at the same time, member states didn’t want to give up their authority over fiscal policy – and thus only gave the ECB control over monetary policy. That was their deal: They wanted to hold full political power at home and transfer power over one area, which they thought would limit the costs of financial transactions between member states. They dismissed the fact that these transactions were unbalanced, as the level of trade between countries was unequal and members’ socioeconomic environments were very different. But while members maintained hope that the EU would bring growth and prosperity, their deal worked out well.

This is no longer the case, which is glaringly apparent in the letters exchanged between the Italian MEPs and Draghi. Problems appeared as the 2008 crisis hit, and economic differences became visible. While Draghi has rarely mentioned the possibility of a country leaving the eurozone, it was discussed in official spheres during the summer of 2015, when Greece faced its own financial crisis. Italy is far from being in a comparable position at the moment. But Europe has grown accustomed to nationalism and populism since the Greek crisis, and radical positions by politicians are no longer the exception but the norm.

The European Union’s economic crisis is political. The deal that was signed in the early ’90s in Maastricht, and updated in Amsterdam, Nice and Lisbon, seems to be no longer relevant. There are no ideas on how to improve or reverse it. But political deals can be changed, and the will to make this happen is growing stronger as countries see that it may be in their national interests to reclaim their monetary power, for better or worse.

In the words of Roger Bootle:

“Could the EU itself survive the collapse of its greatest project, along with the consequent recriminations and financial wranglings between Germany and the southern members? I doubt it.”

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