This is an excerpt from Global Counsel's latest publication Europe in the Global Economy, which can be downloaded in full here.
A decade after the sovereign debt crisis, the eurozone is still subject to structural weaknesses and a widening political divide between north and south. Efforts made towards financial stability have been relatively successful — a centralised, more proactive monetary policy, a single rulebook for bank supervision and resolution and a European Stability Mechanism to facilitate economic recovery. Commitment to the EU also currently outweighs anti-euro sentiment, even when it comes to populist Italy. But Europe has a way to go before achieving full financial integration and its ability to withstand future shocks remains uncertain. Severe public debt levels in countries such as Greece, Italy and Portugal weigh heavy on citizens in the form of public spending cuts and stubborn unemployment. The loss of fiscal sovereignty, compounded by years-long austerity policies, has generated resentment in southern Europe at the perception that little solidarity has been shown by northern counterparts.
The incoming Commission will attempt to facilitate a new bargain that cuts through entrenched “creditor” and “debtor” positions. Sustainability of the eurozone relies on carrying out the final stage of risk sharing, if only to bolster confidence across Europe as a whole, rather than in select member states. However, northern and southern Europe often see the solidarity question differently. This comes down to the manner in which EU eurozone policy is decided and the political space for these decisions, rather than how member states feel about the “rules” themselves. The north views alignment within the eurozone as a precursor to sharing risk and assurance for the eurozone’s future stability. The south sees the sharing of risk as an essential component of alignment and which can help remedy competitiveness imbalances between member states, achieving the very stability sought by the north.
The result is deepening mistrust on both sides and suspicion of Franco-German attempts to develop a solution for all. France and Germany’s Meseberg Declaration seeks a balance between accelerating bank risk reduction while putting forward the possibility of a common eurozone budget. But any budget proposal for the eurozone is vulnerable to a northern-Baltic alliance determined to be more than levers in a Franco-German machine, though some may be amenable so long as fiscal convergence is avoided (e.g. Ireland, Luxembourg). The political shift in Italy represents growing discontent at the reluctance to relax fiscal rules that goes well beyond fringe populist movements, but pro-European countries such as Spain — which greatly reduced its public debt — can serve as a political counterbalance. How to get beyond this messy stalemate is not clear — but it is likely to involve a wider bargain in areas such as migration, defence and trade. Failure to resolve it also risks holding back the EU in these very areas.