A spectre is haunting Europe?the spectre of collapse. The Eurozone sovereign debt malaise, which first reared its head in Greece 18 months ago, could at numerous points have been stopped in its tracks through decisive and bold leadership. Yet, more akin to indolent schoolchildren than authoritative decision makers, Eurozone leaders kicked the can down the road, doing just enough to scrape by. This approach is no longer enough.
Slightly twisting Marx?s famous phrase encapsulates the scale of the existential crisis currently facing the continent. With Italy and Spain, the third and fourth largest Eurozone economies respectively, now firmly tainted through the rot of contagion, and markets experiencing volatility not seen since 2008, Europe is starting to approach the end game. There is no Chinese bond-buying saviour coming to the rescue, as some hoped; the can has been kicked to a cross roads with, in essence, only two paths to choose from: dismemberment, or greater union.
Neither path seems palatable. It says a lot, that until recently the former option was seemingly unthinkable: the euro had no exit clause (to have one would be inconsistent with eliminating currency risk), and even if it did, the political consequences for the EU, let alone economic consequences, made dismemberment a non-starter. Meanwhile most Europeans (not just thrifty Germans, resentful at underwriting potentially trillions of euros for ?profligate and lazy? southern neighbours) would decry the latter, unlikely to regard the remedy to Europe?s problems as ?more Europe? and a greater democratic deficit.
In reality, though, there is but one choice. However unpalatable closer union may seem, it is nothing compared to the consequences of breaking apart, political as well as economic, and for the world as a whole, not just for Europe.
If Greece or Greece and other small peripheral countries exited, fears regarding currency risk would be compounded (what if Italy were to leave?), potentially causing systemic panic that the Eurozone would only be able to allay through unlimited guarantees (much more expensive for Germany than costs of greater union). A German or German and North European exit could prove even worse. Up to a 25% loss in German GDP in the first year (according to UBS) becomes incidental, when one considers that exiting the Euro would entail exiting the EU, and an EU without Germany would threaten not only the existence of the European common market, but the last 66 years of European integration. Although predicting conflict may be hyperbole, all are well aware of the lessons of 20th century history, regarding the results of a divided Europe.
Globally, a double-dip recession would occur as Europe retracts itself from the world and confidence plummets. When put on top of current anaemic growth and diminishing policy options in the developed world (not least Europe itself), as well as slowing growth in many emerging markets, global stagnation seems the result. Given the continent is India?s largest trading partner, and our economy is already slowing, India is particularly at risk.
Therefore, whatever its drawbacks, the path of greater union must now be followed, with conviction and drive.
The preliminary reports from discussions over the weekend by European leaders and the IMF in Washington allege policymakers are close to taking three crucial steps on this path. First, of executing 50% haircuts on Greek sovereign debt. Second, of enhancing the European Financial Stability Facility. Third, of agreeing to bank recapitalisation. All three would be necessary (if not overdue) relief in the short to medium term.
The first step would show Eurozone leaders can acknowledge insolvency, demonstrating their ability to differentiate between illiquid and insolvent members, and thus providing greater credibility when drawing a ring around insolvent ones, and standing behind illiquid ones. The second step would make standing behind illiquid but solvent behemoths (like Italy and Spain) possible, as by enhancing the EFSF to provide first-loss equity, its current ?440 billion could be leveraged by loans from the European Central Bank, to boost overall firepower to around ?2 trillion. The third step would avoid a banking crisis that could occur when already weak European banks, particularly French ones (which rely disproportionately on flighty funding), suffer losses on Greek exposures from a 50% haircut.
An additional fourth step of resetting Europe?s overall mindset towards growth is essential too. However much it is loath to do so, Germany must grit its teeth and fiscally expand to try and reduce the slack created as other economies, such as Italy, make necessary consolidations. The ECB, too, should not be afraid of standing behind the bonds of solvent members and pursuing growth through an asset purchase scheme?something Germany has unwarranted inflationary concerns about.
These would be just the first steps of greater union in a process of long-term institutional harmonisation. Indeed, if Europe?s leaders have the vision, they could even push this longer-term institution building and union in the context of larger global monetary reform. At the very least, though, they must appreciate the urgency of union. It might be unpleasant?but the spectre of collapse is so much worse.
The author studies at Balliol College, Oxford University