Europe’s leaders focus on the next distraction

18/9/2016

By Wolfgang Munchau

The Chinese talk about the monkey mind as a failure to focus. We in the west have the notion of an attention deficit disorder. Both are fitting descriptions for the state of the discussion about the future of the EU in general, and last Friday’s summit in Bratislava in particular.

Our leaders were all over the place — more unfocused than ever. The EU has a still unresolved financial crisis; an unfinished monetary union; an incomplete banking union; large and growing internal and external imbalances; too little investment; negative interest rates; and falling real incomes in parts of the union.

And yet in Bratislava our leaders essentially decided that it was time to move on from such unpleasant realities, and focus their minds on the co-ordination of other policy areas. Having messed up the economy for the past 15 years, they are now turning to security.

The truth is that the EU is not going anywhere before critical elections next year in France and Germany. After that, further integration will happen, not by choice but necessity.

There was a time, two decades ago, when things were different. Then the debate was ideological: you were either a European integrationist, a Eurosceptic, or something in between. There are vestiges of this debate in non-eurozone countries, but with the arrival of the euro in 19 out of the EU’s still 28 member states, most could no longer afford that luxury. The degree of integration is no longer determined by what you believe in, but by what you need. Yes, there are ideological differences between German ordoliberals and Italian Keynesians. But few, even in Germany, believe that a monetary union can be left to its own devices. Most agree that the EU needs more integration to make the eurozone work.

The simple political reason is that they would otherwise end up impoverishing increasing numbers of voters. This has already happened in Italy and Greece. Even in Germany there is now a strong anti-establishment party. In the UK, Brexit shows what can happen to politicians when real incomes fall over long periods of time. The median UK household suffered an actual fall in real incomes after housing costs over 13 years, according to official data. This insurrection happened for a reason.

What will drive EU integration forward is the next crisis and those after that. One trigger may be Germany’s extreme current account surplus. It is approaching 9 per cent of gross domestic product this year. The country’s savings surpluses are recycled into the eurozone’s weak banking system.

This would not matter if it were denationalised, with a central European deposit insurance scheme and a central fiscal backstop. But it is not. Nor will it be anytime soon. If, or rather when, the next banking crisis arrives, the eurozone will hit a moment of truth. The Italian state is too big to rescue, but also too big to fail. Something will have to give.

The combination of a non-resolution of toxic assets in some German banks, non-performing loans on the books of their Italian peers, an economic recovery in Italy that is going nowhere and negative interest rates could the tip the balance. The need to fix this problem, or to prevent it, is what will determine the next stage of European integration.

In the first eurozone crisis in 2010-2012, member states reluctantly created the European Stability Mechanism, an anti-crisis backstop. They introduced new rules on economic co-ordination including early warning systems. The European Central Bank expanded its set of policy instruments, including a safety net and quantitative easing. We could go further. A eurobond, a jointly issued European debt security, may well be one, two, or three crises away.

I am not predicting that the eurozone will invariably muddle through into a bright future, integrating deeper and deeper, step by step. It is just a conceivable scenario. Judging by their current performance it seems more likely that Europe’s leaders get stuck half way. In that case, it would be reasonable to expect the eurozone to unravel eventually under the pressure of its oppressive imbalances and unprofitable banks.

While we cannot predict the precise choices the leaders will make, we can say that if they ever were to end up taking the right decisions, they will have done so reluctantly, with their backs against the wall. They will not plan ahead. The next step of integration will not be the result of a brainstorming session, but some emergency meeting after midnight during a weekend.

This is why informal debating summits like the junket in Bratislava are a waste of time. This is not how the next stage in European integration will happen. As we saw on June 23 in the UK referendum, it is the voters who lead the process now. Our best hope is that this shift will focus the monkey mind of Europe’s leaders eventually.

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