A quicker and more concerted response might have limited the fall-out from the crisis, and thus its cost. The European Financial Stabilization Facility (EFSF), hurriedly established in May 2010 in an effort to stop the rot, will shortly be able to call on some €500 billion in the event that any more eurozone countries face serious liquidity problems. And eurozone member states have agreed to perpetuate this financial-stability mechanism from 2013 onwards, and even to amend the Lisbon treaty to avoid any legal ambiguity.
Despite all this, markets remain unconvinced by the eurozone’s shows of solidarity. Greek sovereign debt has been downgraded to below that of Egypt. Portugal has had to ask for assistance from the EFSF and the International Monetary Fund. Irish banks reportedly need an additional €24 billion to stay afloat. And Spain is doing all it can to avoid the contagion.
The irony is that the euro has been a hugely successful project, bringing considerable stability to participating countries. Indeed, without the single currency, many of these countries would have succumbed to a downward spiral of devaluation, default, and recourse to the IMF.
The European Central Bank has played a crucial role in preventing a worst-case scenario, but the obvious lacuna in Europe’s economic and monetary union (EMU) remains: EMU established only a monetary union and largely omitted the economic union that has proven so closely linked to the euro’s strengths and weaknesses.
The real crisis facing Europe is one of economic governance. Eurozone member states have increasingly gone their own way, even overtly defending nationalist economic policies that harm the eurozone as a whole.
This is not to say that a single economic policy should be imposed on everyone; but Europe does need a higher degree of coordination and convergence to ensure that everyone is at least heading in the same direction. Like cars on a highway, some may drive more slowly than others, but there are minimum and maximum speeds and all must go with the flow of traffic.
Moreover, all motorists must respect the rules of the road, and anyone who breaches them must be held to account, and possibly penalized, because even one rogue driver will most likely cause a major pile-up if not stopped. So it is with economic governance: anarchy would be devastating.
Agreement is needed on both the rules and the impartial body to enforce them. European Union leaders have in recent summits come close to identifying a number of economic-policy areas where closer coordination would improve competitiveness, including sustainability of pensions, wage-to-productivity ratios, corporate taxation, investment in research and development, and the financing of major infrastructure projects.
Yet the same EU members have failed to endow the European Commission with overall responsibility for holding member governments to their commitments and, where necessary, imposing penalties for breaches. This intergovernmental approach lay behind the Lisbon Agenda’s failure to deliver the results needed to make Europe more competitive and dynamic by 2010, and the same shortcomings will bedevil its successor, the new “Europe 2020” strategy.
Indeed, it is a failure of governance that has characterized the Stability and Growth Pact, designed (largely by Germany) to ensure sound macroeconomic policy by limiting national debt and deficit ratios. Most eurozone members are now in breach of the Pact, yet none has been subjected to the penalties envisaged by its architects. Recently adopted changes create a more sensible and graduated system for sanctioning recalcitrant countries, but still leave the decision to initiate an excessive deficit procedure to member states, rather than establishing the more automatic mechanism sought by the European Commission.
Meanwhile, the Commission already polices the internal market -- one of Europe’s major policy successes -- by monitoring member states’ compliance with the single market’s rules. It also launches infringement proceedings against member states that have not implemented valid directives on time, or in the correct manner.
Similarly, EU competition policy has stood firm for many years against monopolies and abuse of dominant market positions. Here, too, the Commission plays the role of neutral judge. There may be disputes in some cases, but the system has brought a degree of legal certainty across the single market that the EU’s member states could not have achieved on their own.
The challenge now for EU leaders is not to repackage old policies, but to express a collective vision and will to act together. I have been arguing for a Community Act that would bring together all elements of economic governance under a single framework, with the European Commission at its center. As with the single-market program of the 1980’s, the Commission could be in charge of overseeing a convergence of national economic policies, within certain parameters, throughout the EU.
Straying outside of those parameters would lead to warnings and sanctions, but otherwise there would be some flexibility for member states to pursue the EU’s collective goals at a pace adapted to their national circumstances. A cluster of EU commissioners holding economic-related portfolios could even be made responsible for guiding the process forward, providing it with direction and momentum.
If European countries are to emerge stronger from the current crisis, they need to think bigger and put more faith, not less, in the collective enterprise that is the EU. After all, European unification was conceived as a project of pooled sovereignty, not surrendered prosperity.
*Guy Verhofstadt, a former prime minister of Belgium, is the leader of the Liberal and Democrat group in the European Parliament. © Project Syndicate/Europe’s World 2011