Can the Eurozone Be Saved?

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The European Council summit, held in Brussels on March 24–25, presented an all-too-familiar tableau: European leaders in Brussels squabbling over questions of economic governance and how to stabilize the eurozone in the midst of roiling financial markets and mounting political crises. As investors questioned the European Union’s willingness to address ongoing financial turmoil in Greece, Ireland, and Portugal, Portuguese bond spreads skyrocketed and Prime Minister José Sócrates’ minority government collapsed.

By the end of the summit, EU countries had agreed to build and fund the European Stability Mechanism (ESM), a permanent bailout facility for the eurozone that extends the temporary European Financial Stability Facility enacted last year. They also agreed to strengthen macroeconomic policy rules to encourage good fiscal housekeeping. But these achievements seem tepid in the face of the European Union’s instability after the financial crisis and may prove to be too little, too late.

Observers could be forgiven for viewing the summit as the last chapter in the failed experiment of European governance. But in fact, if one looks beyond the son et lumière, the European Union remains a remarkably solid and vital political structure nowhere near the brink of collapse. The dramatic headlines mask the ongoing evolution of an extraordinary constitutional order that is more robust than any other interstate relationship. It has profoundly Europeanized national policies, laws, and practices, and its institutions touch almost everything, from citizens and politicians to private firms and government bureaucracies. Despite the operatic drama surrounding the Brussels summit, the real action of the European Union happens daily at a lower level, from the generation of trucking laws through the enforcement of gender equity. No longer rooted only in treaty law, the European Union is enmeshed in the domestic laws of each member state. As such, it would be extremely difficult to disentangle.

Of course, that does not mean that high-level political bargaining and institutional reform are not needed. At this point, the European Union can only move forward if European leaders, particularly German Chancellor Angela Merkel, finally seize the ongoing financial crisis as an opportunity for deepening the European Union’s economic governance system. If they do not, harder economic times and increasing political tensions will be difficult to avoid.

The only long-term solution to the European Union’s currency problems is for eurozone states to commit to enhanced fiscal institutional capacity at the EU level. This way, the entire union’s economic health would not depend solely on a set of unrealistic macroeconomic rules based on the 1997 Growth and Stability Pact, which caps national deficits and debts, and on ad hoc bailouts whenever a country’s economy collapsed. Such a reform would require further political integration, which, in the long run, would calm national markets. Like all other currencies, the euro would finally become a part of a broader confederal government, rather than a political tool masquerading as a technocratic solution to a putative economic problem (the costs of transacting in different currencies across a single European market), as it was originally promoted by euro supporters.

The creation of the ESM at this year’s summit is a step in the right direction. If the eurozone is to hold together economically, it needs financing at the EU level to deal with the insolvency crises of member states. But the ESM is most certainly too little, too late, because the amount of money on the table -- 700 billion euros -- will most likely be inadequate to deal with another major financial crash. Moreover, amassing enough funding after a crisis has already begun is always a Sisyphean task.

A more effective way to ensure eurozone stability would be to create a new EU bond. At the moment, there is no EU-wide official debt-financing instrument. National bonds are denominated in euros but are backed solely by the issuing government. This means that eurozone bond markets are fragmented, with each pooling a relatively small amount of financing. Much as U.S. Treasury bonds are stable and attractive investments because of the broad strength of the U.S. economy, a Eurobond would overcome individual European countries’ economic weaknesses by reflecting the total economic heft of the European Union.