The EU and Euro Keep Defying the Doomsayers

(Bloomberg Businessweek) -- The Hotel Grande Bretagne is an Athens institution. The opulent 19th century mansion on Syntagma Square has been the backdrop to key episodes in modern European history: The first International Olympic Committee convened here in 1896; Adolf Hitler and Field Marshal Erwin Rommel bunked here after the Nazis seized the hotel in 1941 at the start of the wartime occupation. More recently, it was witness to the most existential threat yet to Europe’s experiment in unification.

The debt crisis that emerged in Greece in late 2009 and rippled through the euro region played out on the hotel’s doorstep. Rioters protesting successive waves of austerity measures—and the international auditors who imposed them—smashed the hotel’s marble steps, hurling fist-size lumps at police guarding the adjacent Greek Parliament. The shock of percussion grenades and the bitter taste of tear gas underscored divisions within the 28-member European Union and the failings of the euro, the signature project intended to bind the bloc more closely together.

Of course, the doomsayers were proved wrong. The single European currency survives to mark its 20th year in 2019, and predictions of the EU’s demise have gone unfulfilled. But lately the pessimists have resurfaced. They point to the U.K.’s imminent departure from the EU, the populist Italian government’s attacks on Brussels, and the spread of nationalism in the bloc’s east as evidence that the European project is again in mortal danger. With Germany’s Angela Merkel in the final years of a chancellorship that began in 2005 and France reeling from popular protests against President Emmanuel Macron, the EU’s center looks more vulnerable than ever to forces tearing at its fabric.

Is the end nigh? History would suggest not. Recall just how dire the outlook was at the height of the sovereign debt crisis. Contagion took hold, and Ireland, Portugal, Spain, and Cyprus followed Greece in requesting international aid; the EU was split into richer, mostly northern donor nations and poorer bailout recipients on the periphery. Investors who regarded the euro as inherently flawed from its inception on Jan. 1, 1999, raised their bets against its survival. In mid-2012, Citigroup Inc. economists predicted a 90 percent chance that Greece would leave the common currency within six months.

European Central Bank President Mario Draghi halted the speculation with his pledge to do “whatever it takes” to preserve the single currency. Yet then as today, detractors of the euro—and the bloc as a whole—misread or disregarded the political will to keep both intact. “If the euro fails, Europe fails” was Merkel’s determined message. “The crisis created the political support to strengthen the euro and address weaknesses in the architecture underlying the single currency,” recalls Valdis Dombrovskis, the European Commission vice president in charge of the euro. He cites steps such as the €500 billion ($568 billion) European Stability Mechanism bailout fund and moves to increase scrutiny of euro member budgets to detect and prevent problems before they escalate. Now, more countries are eager for the common currency. Bulgaria and Croatia are moving to adopt it, bringing the number of EU participant nations to 21. “Europe’s monetary and economic union is stronger than ever,” Dombrovskis wrote in an email.

Draghi refrained from striking a triumphant tone in a speech in December to herald the single currency’s 20th anniversary. The ECB chief listed the euro’s successes while admitting not all have benefited equally from it, the result he said of domestic policies and a monetary union that may be stronger but remains incomplete. All the same, the currency’s creation was an “exceptional,” even “antihistorical” response to a “century that had seen dictatorships, war, and misery,” he said.

Similar reminders of Europe’s 20th century history are used by Merkel and Macron to make the case for political unity. But there are cogent economic reasons why even the EU’s most grudging members are unwilling to push nationalist policies to the point of risking a split with the bloc. Poland, for example, where the nationalist government clashed with Brussels over judicial reform that EU officials regard as breaching the bloc’s democratic norms, is the biggest net recipient of EU funds. Eastern Europe’s largest economy receives €27 billion for transportation and environmental projects alone in the current budget period of 2014-20. That’s equal to some 6 percent of annual gross domestic product. Little wonder, perhaps, that Poland backed down on the reforms at the 11th hour.

Meanwhile, the potential for an “Italexit” has diminished as the unlikely coalition of the anti-establishment Five Star Movement and the anti-immigration League has pulled back from its wayward fiscal policy. Concerns remain about Rome’s economic trajectory: Italy is too big to rescue with the existing tools put in place in the wake of the debt crisis. But that kind of crisis probably won’t lead to a departure from the EU and the euro. The League, which polls suggest could govern without Five Star if early elections were held, has its base in the richer north of Italy, including many among the business community who would be loath to risk it all on a break with the bloc. After all, 57 percent of voters say the euro is a good thing for Italy, up 12 percentage points from a year earlier, a November poll found.

The gilets jaunes protests against Macron were a serious expression of disaffection with the way France has been governed—and a drain on his political capital, including his advocacy for the EU. But the movement’s diffuse nature, which enabled voters with disparate grievances to unite in protest via social media, means it’s hobbled by a lack of leadership. Any attempt to politicize it further by contesting elections to the European Parliament in May would end up taking votes from the far right or far left in France and so strengthen the center. In any case, for Macron, humility may not be a bad domestic political strategy.

Domestic politics, too, have weakened Merkel’s influence as the center of gravity for the EU. Still, her party opted to ignore the siren call to shift to the right to recapture voters lost to populism, instead choosing her preferred successor, Annegret Kramp-Karrenbauer, to hold to the centrist course she’s charted. Polls suggest her Christian Democratic bloc has recovered from its lows. Free of the constraints of party leadership, Merkel can focus on European unity—her forte—in her remaining three years in office. She may even spring a surprise that helps bind the bloc more closely together.

The EU as a whole tends to emerge stronger from its many crises. When the U.K. voted to quit the bloc in 2016, many who campaigned for Brexit predicted the referendum result would prove a knockout blow for the EU, with the Netherlands, Denmark, Sweden, or Austria mooted as the next to bolt. Instead, Britain—where the political system is in paralysis over the divorce from the EU—serves as a deterrent to others, a warning of the dangers to a middling global power of pushing national interests to the exclusion of all else. The Brexit effect can be seen across the EU but not as the Brexiters envisaged: Blocwide, 62 percent of people see their country’s EU membership as a positive, the highest figure recorded in 25 years, according to an October Eurobarometer survey for the European Parliament.

“The European Union has been written off several times before but has always proved far more resilient than its critics have assumed,” says Sony Kapoor, managing director of Re-Define, a London-based think tank. “It has lived and even thrived through the fall of the Berlin Wall; a huge, ambitious, and ultimately successful integration of former Soviet states; an existential euro crisis; the conflict in Ukraine; the rise of Donald Trump and Trumpism; and now the farce of Brexit. Yes, there are always urgent, critical, problematic, and important problems to confront, but the EU has proven its resilience beyond all doubt by now.”

The blocwide elections in May could yet see a surge in support for anti-EU parties that may weaken the decision-making European Commission. But the real risks to the bloc in 2019 lie beyond its boundaries. President Vladimir Putin is emboldened by Russian success in Syria and President Trump’s decision to pull out U.S. forces, while Turkey’s President Recep Tayyip Erdogan is preparing to take up the fight against Islamic State. That hands Putin and Erdogan control over a potential fresh wave of refugees directed toward Europe—the bloc’s most divisive issue in years—if the fragile truce over the Syrian province of Idlib is undermined.

Europe is caught in the crossfire of Trump’s trade war with China, and the threat of U.S. tariffs on European cars hangs over the bloc. Tentative efforts to give the euro more of a global role to diminish the dollar’s hegemony are another point of contention with the Trump administration. Yet here, as with Brexit, the lesson seems clear: A common European response is the only realistic option.

And what of Greece? It’s been a decade since the mountain of public debt run up by the country’s governments was revealed. Mistakes were made in Greece’s financial rescue, and debate continues over whether the years of imposed hardship were necessary. Yet Greece exited its bailout program in August, and it still uses the euro. “The euro has not lost its attractiveness,” says Dombrovskis, citing an EU-wide poll that found more than 70 percent of Europeans consider the currency to be a good thing, more than before the crisis.

For Draghi, who steps down as ECB chief in 2019, today’s challenges are “ever more global in nature and need to be tackled together, not alone,” he said in his December speech. “This is even more true for Europeans, both at the level of their individual nations and for the continent as a whole.” —With Alessandro Speciale, Elena Gergen-Constantine, and Ritika Gupta

To contact the editor responsible for this story: Cristina Lindblad at mlindblad1@bloomberg.net, Howard Chua-EoanRitika Gupta

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