A Continent, Sinking

Europe's financial crisis is a Titanic moment, threatening to bring down not only the EU's major economies, but its political raison d'être. Is it too late to save the ship?


PARIS — Europe isn’t going quietly. In this season of continental crisis, both financial and existential, French President Nicolas Sarkozy has yelled at European Central Bank President Jean-Claude Trichet. The European Union commissioner in charge of justice, Viviane Reding, has insulted Sarkozy, who has fired back. Leaders of smaller countries have openly complained about German pigheadedness and French arrogance. The Germans and the northern countries call the Greeks freeloaders, liars, and worse; the Greeks have said Germany should return gold and antiquities looted by the Nazis.

NATO Secretary-General Anders Fogh Rasmussen, meanwhile, chastised certain members of the alliance over its less-than-successful military intervention in Libya, causing the French and German ambassadors to stalk out of the room.

And everyone seems to be disappointed with Angela Merkel, the calculating physicist who is the cautious chancellor of a united Germany, the largest, richest, and most important country in Europe. Merkel, who has an active and reciprocated distaste for Sarkozy, has her eye more on state elections and her weak coalition partner than on the broader challenge of saving the most important Western political project since World War II. The Germans like to say that Merkel “drives in the summer with winter tires,” but for many her hesitations signal a lack of leadership, and her constant emendations and reversals are undermining her credibility, even at home. At the same time, Sarkozy is more concerned with how to patch together the French political right for France’s 2012 presidential election than in taking political and financial risks for the euro.

In Italy, the latest European country to enter full-fledged financial crisis mode, the prime minister, Silvio Berlusconi, is considered a bawdy joke, while in Britain, the new prime minister, David Cameron, with his spiraling problems of austerity and phone-hacking at home, has abdicated any responsibility for or obligation to the fate of the euro, as if the European Union and the 18 countries that use the common currency were as distant from London as Tahiti.

“Europe is in its most severe crisis in 50 years,” Joschka Fischer, the former German foreign minister, told me. “What appears to be a sovereign debt crisis is really a political crisis. We don’t have the institutions or the political will or the leaders willing to do what is necessary. We’re talking about the success or failure of the whole project of Europe since World War II, and everywhere there is a lack of political leadership.”

Even Le Monde admits that this latest crisis over Greece, which is driving up interest rates for Italy and Spain, the third- and fourth-largest economies in the eurozone, “testifies not to the cupidity of the markets, but reflects the irresponsibility of governments.” As Italian Finance Minister Giulio Tremonti not very delicately warned the Germans, “Just as on the Titanic, not even first-class passengers can save themselves.”

Europe, whole and free, is sailing through freezing waters, trying to dodge the icebergs everyone can see. But there are too many hands on the wheel, too many arguments about which way to turn, and no obvious pilot.

The crisis over the euro, the renewed if minor restrictions on free travel, the growing strength of modernized far-right political parties, the anxiety about globalization, the deep unpopularity of nearly all governments, the strains in NATO, the glacial and indifferent pace of the peculiar war in Libya, the inability to respond to the Arab Spring — all are signs of an existential crisis. Two of the proudest accomplishments of European unity — the euro and visa-free travel — are both under threat. And so is the traditionally binding commitment to “solidarity” among the member states.

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The assumptions of both the leaders and the citizenry of Europe have suffered a battering. There have been generational shifts, with fading memories of the horrors and divisions of World War II and the Soviet Union. There has been demographic decline, with aging populations putting intolerable stresses on social programs for health care, salaries, and pensions that once were the pride of social democracy. And there has been an irresponsible explosion of credit under the euro, with the poorer and newer members of the southern tier borrowing at German rates but without structural reforms to raise productivity, shrink the black economy, reduce corruption, collect taxes, and free up labor markets.

Europe, including the newly free countries of Eastern Europe, is both larger and poorer than the Europe of the Cold War, even as the rise of China makes the continent less important. Germany is proud now of acting more like a “normal country,” reluctant to pay all the bills. And postwar institutions like the European Union and NATO have been unable to adjust, leaving them inefficient and unresponsive, driven by crisis to awkward improvisations and sudden changing of what were supposedly fundamental rules.

Both the EU and NATO were designed to work by consensus, but with the rapid expansion to include Eastern Europe and with 28 members each (once Croatia joins the EU in 2013), the old rules of comity and unity have been shattered. The European Union is no longer manageable by the rusty “Franco-German motor,” however important it remains for any kind of consensus. The united Germany has other priorities, and with the inclusion of Eastern European countries with a less statist, more industrial view of the economy, like the Czech Republic, Slovakia, and Poland, the severity of the northern block is now dominant in Brussels.

France, which is simultaneously a northern and a Mediterranean country, is no longer the vital swing between blocs, and it feels more and more a second-rate power compared with booming Germany. Under the impulsive Sarkozy, France has tried to retain influence by making noise and throwing out ideas, both valuable and wacky, seeking again to employ the traditional French strategic geometry of playing off the United States and Russia — or inside Europe, Germany and the southern rim, for which it imagines itself a kind of spokesman and goodwill ambassador.

When the global economic crisis hit, suddenly the cracks in this remade Europe became not only visible but gaping. European bureaucrats, bankers, and finance ministers knew that Greece and Portugal were lagging or lying or both, that Italy’s debt was becoming enormous, and that Spain had a housing bubble, rigid labor markets, and huge unemployment. But they neglected to really attack the substance of the problem, simply papering over the cracks — which worked well enough so long as the markets seemed willing to make no distinction between euro loans to Germany and those to Greece, and so long as European leaders shut their eyes to fake figures and continued to violate their own rules about deficits set down in the Maastricht Treaty. The weaker economies simply rode the credibility of Germany and France to huge loans at low interest rates.

When that changed and the amazing scale of Greek mendacity about its real budget deficit was revealed, the local crisis became a European one. The poorer, most indebted, and least competitive countries were suddenly hit with high interest rates and the reality of debt mountains so high as to be unscalable without lopping off the peaks. Greece appeared small enough, but when Ireland made the colossal mistake of guaranteeing all the debt of its badly managed, risk-taking banks, Ireland and then Portugal soon had to line up with the Greeks at the European welfare office.

Passing the Buck

Terrified of the contagion spreading to much bigger economies like Spain and Italy, European leaders and their bureaucrats kept trying to “ring-fence” the smaller countries through extra loans, but the loans were never quite big enough. And pre-existing treaties (combined with German politics and European Central Bank anxieties) made it impossible to deal with the problem cleanly, either through debt restructuring or collective eurobonds. The first would do too much damage, it was argued, to national banks while creating a feeding frenzy in the markets; the latter would be seen as an open transfer of taxpayer funds from richer countries to the poorer ones.

For Germans, Austrians, Danes, and others, shared sovereignty inside the European Union was a lovely idea, but it did not include sending money to Athens, Lisbon, or Dublin. Vacations on the beach and a love of Guinness and fado are one thing, handouts another entirely. And no political leader — certainly not Merkel — had the inclination or courage to make the leap toward that kind of European unity, despite the stakes.

One short-term compromise, hailed as a solution, begat another, and another. And there was always someone else to blame — the “Anglo-Saxons” for Lehman Brothers, the Greeks, the lazy laggards of the south (“Club Med”), the market, or the ratings agencies. The problem has always been sovereign debt, but it’s not the underlying cause. The real fault line is between the competitive industrialized north of Europe, where economic growth continues, and the south, which cannot make products for a price (given the single currency) that anyone wants to buy at. And now all this austerity imposed on the south — budget cuts, tax increases — only throws these countries into recession, making it next to impossible to grow their way out of debt or create the kinds of change that will make them more competitive in the future.

Instead of a deal, what has become clear is that there is no consensus: It’s the structure of the European Union itself and the difficulty of using one currency for such divergent economies that is the problem. So a banking crisis became a sovereign debt crisis, which revealed a structural crisis, which has created an institutional crisis. The nation-states are battling with the European Commission and, increasingly, with its parliament too.

Indeed, the very Lisbon Treaty that enshrined a constitutional consensus when it was finally entered into force in December 2009 was supposed to allow more efficient policymaking in the European Union. It created a “president” of the council of national leaders, now Herman Van Rompuy, and a “foreign-policy chief” for the union, now Catherine Ashton — but left economics and finance out altogether, in part because the euro is not used by all EU members.

But without integrating and unifying tax, banking, and retirement policies, at the least, or creating a European finance ministry, or allowing rich countries that benefit from exports to help poorer countries that purchase them — much as richer states in federal countries like the United States or Germany help poorer ones — the euro is inevitably flawed.

Whether those flaws are mortal is an open question. Some economists, like Nouriel Roubini, think that the eurozone is doomed and that some countries will have to drop out, after a major restructuring of their debt, in order to be able to devalue their currencies and become more competitive.

But the euro itself has fundamental political importance for Europeans, as a binding project for a Europe with ambitions to play a global role. There is enormous political will to save the euro, and that means Berlin and the European Central Bank are bound to erase more red lines and abandon more rules and principles. For the euro to fail, even Van Rompuy admits, would be for the European Union itself to fail, and that would be a monumentally careless waste of the legacy of those who rebuilt the continent after World War II and the Cold War.

As Fischer, the former German foreign minister, told me this month, “If Europe starts to disintegrate and fall back, in a time of a rising China, this would be an historical defeat for Europe, without a war, and unfortunately my country, Germany, would pay the highest price.”

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A Political Crisis

But with the economic crisis has also come a political crisis, with a new generation with new problems, less beholden to past guilt or dreams. The rise of China and globalization, as well as the expansion of the European Union to the poorer countries of Eastern Europe, most of them still outside the eurozone and where wages are considerably lower, has created an inevitable political backlash.

The old left-wing criticism of American power — “Coca-colonization” and the empire of McDonald’s — has found an echo on the far right, which has similar fears about the power of Brussels, let alone Beijing. The same issues of national culture and purity (combined with anxiety over the permanent loss of jobs to other countries or to immigrants) are where the far right meets the far left. Which is why the National Front of Marine Le Pen does so well now — both in the postindustrial jobless desert of northern France, like the former coal-mining and steel regions around Calais, as well as in its traditional stronghold of the south, where Muslim immigrants from the Maghreb first came to French shores. And there are similar parties growing in strength across Europe, especially in the north, in countries like Sweden, Finland, Denmark, and the Netherlands.

As the economic crisis brings demands for “more Europe” — the phrase implying more integration and more regulation from Brussels — it also brings more Euro-skepticism and even outright anti-Europeanism. Brussels has always been an elite project of senior politicians and bureaucrats, and the “democratic deficit” is enormous, with unelected and well-paid EU officials in the European Commission and the bureaucracy making important decisions about everyday life and commerce. Under the Lisbon Treaty, the European Parliament has more power and oversight. But most Europeans could not say who represents them in the Parliament because legislators are elected mostly on party lists and sit in coalitions that have little relationship to domestic politics.

Even the choice of Van Rompuy as president — a job the drafters of the Lisbon Treaty intended to be filled by a serious, credible, senior European statesman who could represent the European Union in the world — made the problem worse. Van Rompuy, for all his intelligence, is effectively a maitre d’ for national leaders, especially those from the biggest countries, working behind the scenes to cobble together secret deals that leave out not only the citizens of Europe, but even the leaders of most member states. He makes no stirring speeches, does no retail politics, and spends his time running between Paris, Berlin, and other capitals trying to keep national leaders on the same page. It’s not easy to be caught between Merkel and Sarkozy, or finance ministers and the European Central Bank, or the small countries and the larger ones.

Although Van Rompuy has been vital in helping along the existing, if inadequate, responses to the euro crisis, he has done little to explain its importance to ordinary people. So it’s not such a surprise that many Europeans blame the mysterious and unknown Brussels for many of their problems — Brussels is “globalization” writ small.

Thus it was typically myopic when Brussels decided in June that it needed to increase its 2014-2020 budget by 5 percent over the previous budget period at a time when member states were madly trying to cut their own fiscal deficits by slashing government spending and raising fees and taxes. The irony, of course, is that the money was needed, Brussels said, to pay for the European Union’s new responsibilities under the Lisbon Treaty, including the creation of a separate EU diplomatic service (the “European External Action Service”) under the pleasant, hardworking, but hapless Catherine Ashton, a compromise choice who happened to be almost entirely unqualified for her job. It’s particularly ironic when the European Union so badly needs to focus on internal, not external, action. Not that EU foreign policy is going so well, either.

Dead in the Water

The economic crisis has only exacerbated Europe’s other major difficulty, which is its unwillingness to live up to its grand ambitions to play a global role in foreign and defense matters, too. The biting complaints of former U.S. Defense Secretary Robert Gates, on his farewell tour a few weeks ago, about the fading of Europe and a “dim if not dismal future” for an increasingly “irrelevant” alliance were only an echo, if said more harshly, of similar speeches that many NATO secretary-generals have made before him.

In February, at the Munich Security Conference, it was the current NATO head, Anders Fogh Rasmussen, who ominously noted that in the last two years alone, European defense spending had shrunk by $45 billion — the equivalent of Germany’s entire military budget. Only France, Greece, and Britain are spending the agreed 2 percent of GDP on defense, and Britain is now cutting sharply. If these trends continue, Rasmussen said, “we risk a divided Europe” and “a Europe increasingly adrift from the United States.” He noted the rise of China and the impatience of Washington: “If Europe becomes unable to make an appropriate contribution to global security, then the United States might look elsewhere for reliable defense partners.”

For Sarkozy and Cameron, Libya was supposed to be a kind of answer, a riposte to American criticism of a flaccid Europe. But the war against Muammar al-Qaddafi is not an example of European unity, but of France trying to seize the moral high ground as Berlin and Washington dithered.

Sarkozy was particularly scathing about Gates. “I think his retirement may have led him to not examine the situation in Libya very closely because, whatever people want to say, I don’t have the impression that the Americans are doing the bulk of the work in Libya,” Sarkozy said on June 24. “There are certainly other moments in history when he could have said that, but not when Europeans have courageously taken the Libyan issue in hand and when France and Britain, with their allies, for the most part, are doing the work.”

Libya is also a perfect example of NATO’s problems and its dilemmas. Despite French bluster, it is now obvious that without full-scale U.S. involvement, the war has become a costly, drawn-out, somewhat embarrassing affair against one of the weakest military forces in the world — and one that is rapidly bankrupting the military budgets of France and Britain.

If anything, Libya may be a dark model for NATO’s future: internal coalitions of the willing, hemmed in by conditions and national “caveats,” running out of ammunition and targets, without sufficient means to stated political goals. Nor does it help that NATO countries are running roughshod over a U.N. Security Council resolution authorizing military means to protect civilians — not intervention on one side of a civil and tribal war. France and Britain dismiss that essentially moral argument, saying that it is trumped by the defense of Benghazi and the need to remove Qaddafi from power. But a case can be made that the commitment to the “sideshow” of Libya has meant the impossibility of getting Russia and China to act on Syria, where the moral argument and the “responsibility to protect” civilians is even clearer.

So NATO, too, is suffering from a predictable post-Soviet hangover, combined with the strains of rapid expansion to countries that have sharply divergent views about Moscow, Ukraine, Georgia, the Middle East, and the real threats to Europe. NATO leaders, in their latest strategic doctrine, tried to find credible threats to Europe from matters like piracy, when the real rationale for the organization vanished along with the Soviet tanks along the Elbe.


As for Afghanistan, as little said the better. NATO allies are having a long collective buyer’s remorse over their post-9/11 declaration of an Article 5 war against al Qaeda and the Taliban. Britain and France, still losing troops there and spending almost as much now on Libya as Afghanistan, can’t wait to leave. And no one thinks anymore that the war can be “won” in any traditional sense, that there will be any glorious ending, or even that the impact of this latest Western involvement will be lasting.

In July, after seven French soldiers died in a single week in Afghanistan, Sarkozy, hatless in a downpour, led a funeral service at Les Invalides, pinning the Légion d’Honneur on all seven coffins. It felt like a funeral for the entire effort to bring Western values of justice and gender-equality to Afghanistan. Everyone is biding their time — not just the Taliban, but the Europeans, too.

The End of History

After the monstrous bloodletting of the last few centuries, European solidarity and shared sovereignty seemed like the answers to blood feuds, racial wars, rabid nationalism, and economic autarky. Even after the failures in the Balkans, the Lisbon Treaty promised a new efficiency about decision-making and a larger footprint in security and foreign policy. The European Union promised to be a kind of shared platform for global competition and, as the analyst Bernard Avishai recently wrote, a bulwark against “the fragility of civilized liberalism.”

So the disarray today is not only depressing, but destabilizing to the core of Western values and its political system, liberal democracy, that we all thought had won the competition between East and West.

It was both ironic and fitting, then, that it took a new member of the union, Poland, which has just taken over the EU presidency, to make one of the more stirring calls to re-create and reanimate European solidarity. In late June, as European leaders gathered in Brussels and as Greece seemed on the verge of a sovereign default, Prime Minister Donald Tusk made it plain: “Europe is now trapped in a political and civilizational crisis,” he said. “Nobody says it aloud, yet but everyone can sense it: It questions the future of the European Union.”

Salvaging Greece and the other countries in difficulty, he went on, was only self-interest. Put aside “national egoism” and false “realism,” he said — it can only lead to disaster. “By helping the Greeks or other countries at risk, the biggest countries of the European Union help themselves.” It’s time for Europe’s leaders to decide whether they’ll sink alone or swim together.

Steven Erlanger is the Paris bureau chief of the New York Times.

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