By Andrew Moravcsik*
JUST SIX MONTHS ago, the media were rife with predictions about the collapse of the European Union and its currency in the wake of the economic crisis. Credit agencies issued downgrades or downgrade warnings for countries like Spain, Portugal, Ireland, and Greece. Even more serious debt crises were expected in Central and Eastern Europe. With the euro dropping against the dollar by 5 percent per month, some expected governments to abandon it. Others warned in dire tones of a looming European trade war. And many expected that the economic turmoil would kill hopes of finally enacting the Treaty of Lisbon (a.k.a. the EU Constitution), or at least sapping the will of European citizens to cooperate on common policies such as defense, energy, and enlargement. One conservative American publication called it "the worst crisis of Europe's 50-year history"; a European establishment magazine warned of Europe's "breakup."
Today, it's clear that the crisis has renewed European solidarity and seriousness of purpose. Europe is stronger than ever. What explains the quiet turnaround? The leading nations of Europe did not lose their nerve, and they did not work only to protect themselves, as many pundits predicted. Instead, they rushed to save their neighbors. In monetary policy, small nations realized that they lack the capacity to act as a credible lender of last resort for domestic banking systems that conduct many of their transactions in foreign currencies. Large nations, Germany in particular, realized that their banks, investors, and exporters would take a catastrophic hit if smaller neighbors went belly up.
So the European Central Bank responded by pouring money into euro-zone banking systems. The Stability and Growth Pact, which restricts public spending, was relaxed to permit governments to recapitalize their banks. And in an unheralded and entirely informal expansion of EU responsibility, perhaps the largest since the 1999 launch of the euro, the central bank accepted responsibility for stabilizing EU countries outside the euro zone those that still use their own currencies. It extended guarantees and swaps to assist efforts to stabilize financial systems that otherwise might have been forced to impose a punishing interest-rate hike or devaluation.
The most striking example was the bailout of Latvia, managed jointly by the IMF and the EU. The turnaround in trade is no less spectacular. The first moves were ominous, as France moved to subsidize its troubled auto sector with a "cash for clunkers" program, and its neighbors followed. But in March, European leaders made a collective commitment to avoid further protectionist measures, and they stuck to it. The core of Europe's single market, “a ban on tariffs, quotas, and subsidies, protected by the Schengen Agreement prohibiting border controls and competition policy”, seems to be holding firm.
If anything, the crisis is boosting the European project. Irish opposition to the Treaty of Lisbon, which will create a president of the EU and otherwise strengthen its institutions, has crumbled. Declan Ganley, leader of the forces that stopped the progress of the treaty cold in the Irish referendum last year, staked his political future on a run for the European Parliament and lost. He has promised to retire, and a June 5 poll shows the Irish are now set to approve the treaty 54 percent to 28 percent when they vote again in October. That removes the last major obstacle to passage of the treaty, a document not all that different from the previously thwarted "constitution" to create a stronger Europe.
Having shown that membership offers protection from a crisis, the EU is more attractive than ever. It is likely soon to total 30 members, up from 27 today, with more in line. Iceland, the first nation to go bankrupt in the credit crunch, recently applied. Even self-sufficient Switzerland is said to be showing some interest in membership. The crisis also taught many governments that if they want to be players in international finance, they need to join the euro rather than defend national currencies against global market forces with weaker national policy instruments. Poland recently reiterated its commitment to adopt the euro, and public opinion is shifting in favor of the currency in Denmark and Sweden.
Europe's turnaround does not suggest a fall in nationalism, or a mass conversion to European ideals, as convinced federalists might wish. Nor does it follow from an elite conspiracy to impose a strong Europe on an unwilling public, as British tabloids crow. The motives are pragmatic, which is always the case when Europe takes a big step forward. The crisis taught Europeans that if they want to protect their prosperity, there is no alternative to tighter policy coordination. If European institutions are more advanced than those elsewhere in the world, it is simply because the continent is more interdependent economically, legally, even culturally than any other. In tough times, a united Europe is viewed, with some justification, as an economic and political safe haven.
*Andrew Moravcsik Teaches At Princeton and Directs Its European Union Program.