Europeans back from summer vacation this week may be wishing they’d stayed on the beach. Stock markets in Germany, Italy, and France all dropped about 5% Monday, after the so-called “troika” of European institutions (the International Monetary Fund, the European Union, and the European Central Bank) butted heads with the Greek government over its budget targets. Yields on Italian and Spanish bonds skyrocketed again, with investors growing more fearful of a European collapse. U.S. markets, back from the Labor Day weekend, are now falling, too. With the European economy slowing and more European politicians battling with angry electorates, the question is whether the continent has any more rabbits to pull out of its beaten-up hat.
Many economists think the only solution now is for Europe, already shackled to the euro, to bite the bullet and become a fiscal union. That means adopting a system similar to the United States, whereby European states pay into a central treasury, which then has the power to transfer funds from stronger to weaker states. That kind of structure is what allowed the U.S., in a time of crisis, to throw together a massive bailout to save the financial system without shattering its union.
At the moment, Europe doesn’t have that luxury. Talk of strengthening its economic union cost German Chancellor Angela Merkel her fifth defeat in local elections over the weekend, this one in her home state. Germany’s constitutional court, meanwhile, may be cooking up legal limitations on future bailouts for Greece. Italy had its first mass demonstration against austerity measures Tuesday. And Finland is demanding special treatment for doling out more cash to Greece. As WaPo’s Ezra Klein notes, these moves have converted Europe’s debt crisis into a political one.
The hitch to the latest touted fix (Just create a fiscal union!) is how to make it happen. After all, creating a politically unified system requires, well, political unity. And so far every fix to Europe’s debt crisis has required wary parliaments and governments to sign off. That’s why, more than two years after Greece’s first bailout, bigger reforms to the European project are still in limbo. For now, Europe’s only hope has become the ECB, which doesn’t have to answer to an angry public, and which, in the absence of bigger reforms, has swooped in to prop up Italy and Spain’s bond markets.
For their part, European heads of state have already dismissed the various proposed routes to political unity – creating an “economic government” or issuing common “Eurobonds” – depending on how their constituents stand to lose. Small countries fear an economic government led by countries like Germany would lead to bullying, while stronger countries like Germany oppose the idea of Eurobonds, which might let weaker countries off easy. Another proposal to implement balanced-budget rules in member countries has gained some traction in Italy, Spain, and France. But those still can’t guarantee that profligate countries would take on needed structural reforms.
In the end, creating a fiscal union in some form may indeed be the only way to save the eurozone. But such measures – evermore unpalatable when the downsides are at the doorstep – should have been implemented when the union began. The only route to more political integration now may be by force. After all, market meltdowns tend to speak louder than cowering politicians.