Analysis

Winnipeg Free Press - PRINT EDITION

After quiet summer, big week ahead for fate of euro

By: The Economist

Posted: 09/10/2012 1:00 AM | Comments: 0

At least August was quiet.

Thanks to Mario Draghi, chief of the European Central Bank, euro-zone policy-makers got some badly needed R&R. His July promise to "do whatever it takes" to protect the euro from speculation was enough to persuade traders to pack their bags and head for the Riviera.

Now, though, the euro zone looks woefully behind in its mission to save the single currency. That is partly because a rescue is genuinely complicated, but it also is because too many people think that time is on their side.

At the moment sluggishness may seem like an odd accusation. The next month will contain a summer's worth of news. As The Economist went to press, Draghi was to carry through his pledge to limit the cost of medium-term borrowing by governments -- and hence by companies.

On Wednesday, Germany's senior court will rule on whether a euro-zone rescue fund is constitutional.

The same day the Dutch will vote and the European Commission will unveil its thoughts on a Europe-wide banking supervisor, a step toward a banking union.

Within weeks the troika that recently arrived in Athens will report back on whether to give Greece its next installment of rescue money, and all the while a restless succession of meetings will continue as leaders prepare for a big summit in October.

Measured against what needs to be done, however, this is inadequate. Even if the ECB successfully intervenes, the euro zone's politicians must ultimately determine the euro's fate. Although work on a banking union has begun, they are many months away from actually setting up one. Leaders increasingly recognize the dangers of excessive austerity, but they still routinely demand harsh budgets as a token of merit.

The debate about mutualizing some government debt has barely begun, and the vague German demand to shift political power to federal Brussels has hardly been broached in France.

Some euro-zone leaders think that is fine. With time, the reforms underway in the euro zone's troubled economies will bear fruit. If skeptical politicians and voters have a chance to contemplate the ruinous alternative of a euro breakup, they will warm to mutualization and federation, the same way they have put up with bigger transfers of money and sovereignty than ever seemed possible at the outset of the crisis two years ago. In the end, self-interest and good sense will win out.

In fact, however, time may be working against the euro. Uncertainty and austerity are deepening Europe's economic plight. The euro zone looks to be back in recession. Unemployment is at a record high. Surveys of consumers and business activity make dismal reading, and the malaise has spread to Germany.

Prolonged economic stagnation will make it more expensive to keep the euro together and will poison the politics of a rescue.

Any of this week's events could throw up another barrier. A German court ruling against the bailout fund would be the most dramatic. The Dutch vote could further tie the hands of that nation's politicians, however, and the banking-union talks could spark a fight over regulation.

Far from bringing countries together, the crisis is tugging them apart.

To stop the rot, France and Germany -- still at the heart of Europe -- need to settle on a rescue and prepare their parties and their peoples to accept it. Nothing will happen without that.

It means grappling with the sort of federalism that statist France always has rejected. It means Germany accepting some debt mutualization. Nobody said that this would be easy.

If Chancellor Angela Merkel and President Francois Hollande simply wait for time to do their job for them, however, they will lose control of their fate.

Republished from the Winnipeg Free Press print edition September 10, 2012 A11

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