I do not envy the current European leaders their task. Over the past 60 years, Europe has developed into the largest political union and biggest economic market the world has seen. To keep it is a huge responsibility. So I write with deep humility and respect for those called on to discharge that responsibility.
This crisis is existential for Europe. The design flaw of the euro is now manifest. It was a project entirely right in principle – to combine a single market with a single currency – but the way it was done, and the speed with which countries came into it, meant that it was a project driven by politics but expressed in economics. (Britain had political doubts for sure but stayed out for primarily economic reasons.) Now the politics and the arithmetic are in conflict.
For Germany the dilemma is acute. To lose the euro now would be a disaster: economically, not just politically. On the other hand, to “save” monetary union, Germany is being asked to fund the bailouts, inflate its economy, and stand behind the debts of the countries that have not undertaken the necessary reforms. Unsurprisingly, the German people are reluctant to do this.
The politics of Europe is thus poised between those offering austerity cuts and painful reforms, and those offering growth stimulus and no reforms. Yet it is clear that without growth, reforms are extremely difficult to enact, as otherwise the union as a whole faces a downward spiral of rising unemployment, falling growth, lower tax receipts, and deeper cuts in spending that in turn further worsen growth. I don’t know what the social consequences of 50 percent youth unemployment in Spain will be, but I suspect that if it becomes entrenched, they will become dangerous.
It is also clear, however, that without implementing what are difficult but long overdue changes in areas like internal labor markets, welfare provision, and state pension systems – the types of changes Germany has made in the last two decades – pro-growth fiscal policy will be unaffordable and Europe will become increasingly uncompetitive.
At present the sense is that, step by step, Germany moves toward what it is being asked to do, however reluctantly, while the rest of Europe pursues an erratic path to reform.
So despite huge efforts by the German leadership in particular, the result is that neither German commitment to save the euro nor others’ commitment to reform is entirely credible. So the markets continue to speculate, and the price of saving the euro rises daily.
Cheap money from the European Central Bank at the start of the year bought some time for the financial sector, as has the important decision to directly support Spanish banks. But the danger is that we are always two months behind the curve.
What Europe now needs is a Grand Bargain, in which all the decisions necessary to put the euro on a sound footing are taken. Germany has to agree to some form of debt mutualization – for example, as suggested by the German Council of Economic Experts – while simultaneously signaling and then implementing fiscal stimulus.
Debtor nations have to agree to reform and do so through precise, credible, and timetabled programs. A proper – though potentially painful – plan to clean up bank balance sheets has to be communicated to the markets, along with certainty around the long-term changes to banking and fiscal policy. There will be inevitable demands for reform of Europe’s institutions on the back of these changes and a clear process for agreeing to those reforms should be set out.
The best thing now is to force everyone to make the big decisions and make them together. We need policies for growth, reform, and unity.
For this generation of leaders, we are used to periodic crises that somehow resolve themselves. This crisis is different. It is a new experience for us, with the 1930s the nearest parallel. All the choices are ugly, but the least ugly for Europe, and for Germany in particular, is to save the euro.
Tony Blair is a former prime minister of Great Britain and a member of the Nicolas Berggruen Institute’s Council for the Future of Europe. This article first appeared in Bild Zeitung.