Blog Post

Europe’s integration overdrive

May 10 is the fifth anniversary of the bailout of Greece. Set almost exactly 60 years apart from the Schuman Declaration, the events triggered by the Greek bailout have unleashed a daunting challenge to European cooperation and harmony.

By: Date: May 19, 2015 Topic: European Macroeconomics & Governance

Sixty-five years ago on May 9, French Foreign Minister Robert Schuman read a 
Declaration, triggering the birth of the European Union. Still in the shadow of 
World War II, Europeans began to create, historian Tony Judt writes, “a new
and stable system of inter-state relations.” Put simply, Europeans learned
once again to work with and talk to each other. It was a magnificent
achievement.

Europeans have lost the ability to talk to each other.

May 10 is the fifth anniversary of the bailout of Greece.  Set almost exactly 60
years apart from the Schuman Declaration, the events triggered by the Greek
bailout have unleashed a daunting challenge to European cooperation and
harmony. Above all, Europeans have lost the ability to talk to each other.
For some, this is not a European problem—it is a Greek problem. Greece, so
this view goes, is sui generis, and once it is brought back into the fold, the 
systems of cooperation will return to normal functioning.

That is a mistaken view. The Greek problem will not go away. But the bigger 
problem is that the euro placed European integration into an unmanageable 
overdrive.

The policy package proposed by Greece’s creditors, requires further austerity 
and reduction of wages and social benefits. Those measures will help down 
the road, but the deflationary contraction will work faster. Debt will become 
harder to repay.  A debt-deflation spiral could overwhelm Greece quickly.  
German Chancellor Angela Merkel has blamed her predecessor Gerhard 
Schroeder for allowing Greece to enter the Eurozone.  Indeed, Greece should 
never have been in the Eurozone. But the real problem lay in the construction 
of the Eurozone itself.

Greece should never have been in the Eurozone.

Schuman had said: “Europe will not be made all at once, or according to a 
single plan. It will be built through concrete achievements which first create a 
de facto solidarity.” That philosophy was admirably embodied in the Treaty of 
Rome in 1957, when European nations opened their borders to each other. 
Numerous commercial relationships sprouted among the European 
businesses and citizens.  Empathy for the trading partners generated a sense 
of European identity. Citizens’ trust in European institutions followed the 
share of intra-European trade. The Treaty of Rome succeeded because it 
aligned national interests—nations and their citizens all gained through 
enhanced commerce.

With the euro, national interests collided. A common monetary policy is more 
favorable for some than for others. And crucially, the euro created the ever-
present risk that one nation would have to pay the bills for another. The 
Treaty of Rome created a “level playing field,” in which nations participated as 
equals. In the euro area, some nations are inevitably “more equal than others.” 
Greece must play by the rules of its creditors—even when these are evidently 
dysfunctional. Proponents insist that this will discourage others from 
deviating, and fidelity to the rules will ensure a stable Eurozone. But that 
equilibrium will, at best, be fragile. The problems will worsen in Greece and, 
will inevitably, arise elsewhere.

The economic and political costs of breaking the Eurozone are so horrendous 
that the imperfect monetary union will be held together. Instead, the cost of 
the ill-judged rush to the euro and mismanagement of Greece will eventually 
be a substantial forgiveness of Greek debt. 

This is a good moment to step back and loosen European ties.

But this is a good moment to step back and loosen European ties. As Schuman 
said, “Europe will not be built according to one plan.” The task is to create a de 
facto solidarity—not to force a fragile embrace.  A new architecture should 
scale back the corrosive power relationships of centralized economic 
surveillance. Let nations manage their affairs according to their priorities. And 
put on notice private creditors that they will bear losses for reckless lending.
The European fabric—held together by commercial ties—is fraying as 
European businesses seek faster growing markets elsewhere. That fabric 
could tear if political discord and economic woes persist. History and 
Schuman will be watching.

This piece was also published in Handelsblatt.

Read more from Ashoka Mody:

The IMF’s big Greek mistake

Greece and the André Szasz axiom

A Schuman compact for the euro area


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