Europe’s Great Project Faces Its Biggest Challenge in Greek Bailout Referendum

Europe’s Great Project Faces Its Biggest Challenge in Greek Bailout Referendum

The euro is EU’s crowning glory and the instrument that may most seriously challenge European unity

By STEPHEN FIDLER

July 2, 2015 8:04 p.m. ET / http://www.wsj.com/articles/SB10130211234592774869404581084170552090938?mod=e2fb

The great project that some hoped would eventually create a European superstate faces the biggest challenge of its 65-year history on Sunday, when Greeks vote in a referendum that could decide whether they crash out of the eurozone—and shift the continent’s destiny.

The European Union, whose precursor brought the region’s nations together after World War II and later helped cement a Western trajectory for countries in the former Soviet bloc, isn’t set to break up. But it has stumbled on the path toward what supporters saw as its future: an ever-closer communion of nations.

What has largely brought this about is the instrument seen as its crowning glory: the euro. The discipline required to tie one’s national currency to that of Germany and its relentless export machine has taken a toll on political systems and politicians across the eurozone, particularly in the south. It has tested Greek democracy to the breaking point.

“The EU is in deep crisis,” Kris Peeters, Belgium’s deputy prime minister, told a conference Thursday. “For the first time in its history, it’s in danger of becoming a less-close union.”

The risk of a Greek exit appeared to grow Thursday as the pivotal vote approached. The International Monetary Fund, whose debt Athens defaulted on earlier in the week, warned that the extended conflict with its creditors had left Greece in even worse financial shape than before, needing an even bigger bailout to remain in the eurozone.

Meanwhile, Greek Prime Minister Alexis Tsipras took to the airwaves to insist that voting against the bailout and its conditions would immediately spur a better deal for the country—the opposite of what his counterparts representing the country’s creditors have consistently said.

To be sure, the European idea has been eroded elsewhere. The British have attacked the concept of “ever-closer union” enshrined in the EU treaties and have sought a renegotiation to take powers back to London. Some nationalist politicians, such as Hungarian Prime Minister Viktor Orban, have presented a challenge to the values around which the bloc has been built.

Large-scale immigration—of people inside the bloc and the growing number of desperate refugees from the chaotic regions on its borders—is raising questions about whether the fundamental tenet of freedom of movement is sustainable and is putting pressure on some national welfare systems.

Member states, including Germany and France, are suffering “enlargement fatigue” and are resistant to further outward expansion to new members.

The EU has also been a victim of a generalized backlash against globalization, as many ordinary people see their interests as having been submerged by those of a globalized superelite, of which the well-paid bureaucrats in Brussels are viewed as a prime example.

The long-term rise in unemployment—which in Western Europe in the 1960s averaged below 2%, compared with rates above 20% now in Greece and Spain—is a manifestation of an economic malaise that many voters blame on the EU.

Wolfgang Schüssel, a former federal chancellor of Austria, said the EU is often a scapegoat for more general ills. “Would the results be better without European integration? Would there be more jobs, more investment?” he said in an interview Thursday.

The euro is at once the bloc’s most ambitious project and the one that may most seriously challenge European unity.

The common currency was a logical extension of what went before: the next phase of economic integration. Its attraction to Germany, in particular, was that it would prevent countries like Italy from undercutting more efficient competitors through repeated devaluations. But it had a political genesis—and many of its architects were aware of its economic weaknesses.

The pitfalls were widely discussed. “Uncoordinated and divergent national budgetary policies would undermine monetary stability,” argued a 1989 report from a committee headed by Jacques Delors, then a powerful president of the European Commission, that paved the way to the euro.

The euro was created, despite this and other reservations, in part on the assumption that creating facts on the ground would force politicians to strengthen its architecture and push toward greater political integration to reflect the uniting of currencies.

Yet, in its early years, politicians weakened rather than strengthened the foundations of the euro, giving Germany and France a free pass when they broke eurozone budget rules.

It took a crisis, which started in Greece, to recognize that something further had to be done to ensure the union survived.

That now is a large part of the problem: The economics of the eurozone call for deeper economic and political integration, but the politics are pulling in the other direction. Populations in the creditor economies, largely in the north, are resistant to transfers of resources to help out their eurozone partners. And populations in the debtor economies rail against the tough conditions being imposed on them to receive any such help.

This is the German approach to crisis resolution, and it has become the European approach because Germany is the largest economy and biggest bankroller of the bailouts. Its critics argue that this has immeasurably increased the costs of the crisis, and say that the emphasis on austerity has wrought huge economic damage and human suffering.

Berlin and its allies regard this pain as a necessary corollary to fix the problems that brought the crisis about.

What is certain is the adjustment has fanned support for political parties outside the mainstream, including the ruling left-wing Syriza movement that now holds power in Greece.

Germany has insisted on tying its aid to tough budget and other economic adjustments, reflecting a factor that has corroded relations with the eurozone: governments don’t trust each other. “Trust is what the EU is built on,” said Mr. Peeters. “It’s that lack of trust that divides the EU these recent days.”

Other governments don’t trust Greece and its politicians, in particular. Trust was radically undermined from the onset of the crisis in 2010 after Athens admitted to having lied about its economic statistics. The administration of Mr. Tsipras seems to have killed its last vestige.

Greece has always been treated as a special case: It was brought into the union in 1981, five years before Spain and Portugal, in part based on romantic justifications such as its having been the “cradle of democracy.” Greece was hurried into the euro in 2001.

Now nobody argues that it was right for Greece to join the euro. But once in a currency union—and having turned the aquarium of separately swimming currencies into a fish soup of a single unit of account—making the reverse step is a leap into the unknown that will likely further damage the welfare of Greeks, at least in the short term.

But the nature of the eurozone would change too, fundamentally. No longer an irreversible union of currencies, it would become, in the words of the former European Council President Herman Van Rompuy, like a cafe where people drop by and leave at will.

From then on, each time a financial crisis hits, it will raise questions about whether politicians will be willing to pay the high political price to stay in the euro.