Tomorrow, Dutch elections and the German Constitutional Court's decision on the eurozone bailout fund have the potential to shake up the plan for Europe's debt crisis – again. Europe must shift away from piecemeal, stopgap measures and set the framework for a true banking union.
Europe is in for a hot fall.
On Wednesday, the Netherlands is expected to elect a new government, likely to be more critical of the European approach to the continent’s sovereign-debt crisis. Also on Wednesday, the German Constitutional Court is set to decide on the constitutionality of the European Stability Mechanism – the eurozone’s new permanent bailout fund and fiscal compact. And in October, the so-called troika of EU officials – the European Central Bank, European Commission, and the International Monetary Fund – will assess the progress made in Greece and decide on the next tranche of support funds.
All of this will then culminate in a European Union summit in the middle of October that could prove decisive in addressing Europe’s crisis.
Separately, these events are unlikely to derail the euro-crisis resolution plan centered on incremental steps toward further integration. A new Dutch government, like the new French government before it, is not likely to instantly alter the European course. Most observers also believe that the highest German court will approve the permanent European Safety Mechanism, if potentially with new conditions. And while the EU troika could deny Greece further funding, this seems improbable.
Taken together, however, these developments highlight the dangers inherent in the slow-paced, piecemeal approach to solving the eurozone’s woes. The problem with the current approach to European crisis resolution is that it requires time and overall, ongoing stability and thus relies on a number of pieces falling into place. If those pieces don't fall into place, the approach falters.
Of course, by now the end of the eurozone has been predicted countless times. On occasion, according to those assessments, the monetary union had merely months to live, or only days remained to implement the one big solution to end the crisis. None of these doomsday scenarios have yet to play out, and so far, potentially disruptive events, like the first round of Greek elections in the spring, did not turn out to be major obstacles. But European policymakers would be unwise to disregard the continued potential for and effect of high-impact events.
As the euro-crisis has simmered along, boiling up from time to time, a precarious crisis routine threatens to creep in – one based on piecemeal solutions and stopgap reactions. For sure, contingency plans for some scenarios have been drawn up in finance ministries across the continent. For example, according to newspaper reports, a special working group in the German government has been calculating the costs of a Greek exit from the eurozone. But a so-called Grexit is only the most obvious of a number of potentially harmful developments.
Whether contingency plans can take into account all possible scenarios remains questionable. External shocks such as a hard landing of the Chinese economy or internal surprises like an unexpected decision by the German court could cause major instabilities that may well unravel the current crisis response. A further slip toward a purely reactionary crisis-management routine therefore must be avoided.
Over the past few years, European policy makers have come a long way in reshaping the eurozone’s institutional framework and correcting some of its original design flaws. It is now time to finalize these arrangements. This will not necessarily require the creation of a European nation state.
Instead, Europe needs a fully functioning safety mechanism; a true banking union, agreed to in principle at the EU summit in June; and further support for troubled countries to lower their debt burdens. The European Central Bank’s newest announcement of potentially unlimited bond purchases offers some breathing room and further assurance. But the other pieces of the puzzle must soon fall into place. The next few months, including the October EU summit, should be used to complete the new framework.
A first hurdle could be cleared tomorrow, if the German judges accept the legality of the European Stability Measure. In a next step, a eurozone-wide banking union must be established to break the fatal link between weak banks and troubled states. This means creating a new authority with supervision, rescue, and, if necessary, resolution powers over all major eurozone banks. At a later stage, a joint deposit insurance scheme will likely have to be added.
Over the past years, onlookers and officials have said "this is the summit" that will solve Europe’s crisis and put in place the mechanisms to prevent future ones. So far, these summits have all come and gone, and the crisis continues. Amid the questions and changes on the docket for this fall, now is the time for Europe to take the decisive steps in finalizing its monetary union – for the sake of the euro’s survival and much of the global economy.
Peter Sparding is a transatlantic fellow for economics at the German Marshall Fund of the United States. The views are the author's alone.