Feb. 3 (Bloomberg) -- The euro-area crisis is forcing many of the European Union’s long-running political disputes to the surface at the same time. As they wrestle to save the currency, Europe’s leaders -- above all Britain’s David Cameron, France’s Nicolas Sarkozy and Germany’s Angela Merkel -- need to make sure they don’t dismantle the union in the process.
Political tensions peaked in December, as Europe’s leaders were rushing to put together a fiscal compact that would convince markets that euro-area countries can get their sovereign debts under control. Cameron tried to leverage the need for a treaty to protect the U.K.’s lucrative financial sector from new EU regulations, in particular a transactions tax that is being proposed by France. When he failed, he vetoed the treaty, forcing the others to work outside the EU.
As after any domestic fight, it’s taking awhile for EU leaders to figure out whether their marriage of 27 can be the same again. In one positive sign, despite political opposition within his party, Cameron agreed this week to make an important concession: The U.K. won’t stand in the way of letting other EU members use the union’s buildings and bureaucracy to carry out their new, non-EU, fiscal compact.
Act of Sanity
Cameron’s act of sanity shouldn’t obscure that this is a dangerous moment for the EU. This remarkably successful political project -- aimed at preventing a repeat of the horrors of two world wars -- is often misunderstood. Euro-skeptics like to portray the EU as a leviathan that has subordinated national sovereignty to eurocrats; federalists present it as a train rolling on tracks that lead inexorably toward a United States of Europe; outsiders often see it as a genteel post-modern union, in which nations work out their differences by committee.
The reality is messier, more competitive and more vulnerable. It is a union achieved over decades with as much bubble gum and spit as vision, in which the critical players struggle continuously for the power to shape the union to their advantage and bide their time when obliged to cut deals and compromise on goals. To complicate matters, populist movements in many EU countries, from Hungary to France, are now targeting the EU as a proxy for complaints about globalization.
The perennial tension between the European Commission (an unelected European bureaucracy based in Brussels) and the European Council (which brings together the elected leaders of national governments) is also coming to a head. Part of the deal in the EU has long been that big countries rule at the Council, but the little ones are protected by the Commission. Yet as Germany takes the lead in forging a tighter fiscal union, inevitably the Commission is being sidelined. Rarely, if ever, has the EU been so dominated by a single country. Any crude move -- such as Germany’s rapidly dropped suggestion that a European budget czar be able to veto Greek fiscal policy -- can become political dynamite.
Then there is the longstanding debate between integrationists -- who want a smaller, more unified EU -- and those who favor an EU that is looser and keeps adding members. The EU is already running at multiple speeds to accommodate these competing views, but the euro-area crisis has given new life to the argument that the bloc should divide more formally into a tightly integrated inner core and the rest.
What you might call the EU’s ideological balance also risks being upset. Traditionally, France and Germany pushed for more continental solutions to Europe’s problems, including extensive labor regulations and other elements of what’s often called “social Europe.” The U.K., often allied with Scandinavian and Eastern European countries, pushed for more market-based solutions. Cameron’s self-inflicted exile risks weakening the impetus for changes that the EU still badly needs.
Merkel and Sarkozy are right to focus all their efforts on the euro right now. Indeed, they should be doing more and faster to ensure the currency survives -- the fiscal compact itself is a longer term fix of little immediate interest to markets. Failure would be calamitous for the EU and the world’s economy. But they need to resist the temptation to use this moment to sideline the non-euro countries and create a dual Europe, no matter how attractive it may seem to be rid of the awkward Brits. The onus on Cameron is to restore confidence in his government’s commitment to the EU.
Otherwise, saving the euro may come at the expense of breaking the EU into a divided Europe of core and periphery countries. That outcome would make Europe poorer and weaker at a time when it needs all the strength it can muster to compete on the global stage.
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