Twin Challenges for the European Union

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By

M Saeed Khalid [1]

The pictures of a graffiti called “Death of Euro” painted by French street artist Goin on a wall in Athens have been flashed across the world.

But a more ominous warning about the possible demise of the common currency or at least a Greek exit from it was evident at the banks in Athens. Hordes of panicked Greeks rushed to withdraw their Euros fearing that none might be left in the banks as the prospect of a Greek default loomed larger with each passing day.

Why should people in Asia or elsewhere be concerned over a debt repayment by an EU member? Because a potential Greek default on its $ 340 billion debt carries forebodings of dire consequences on the world economy. To put it simply, a financial crunch in the Euro zone could have direct consequences for Pakistan’s textile exports.

Last ditch efforts were, therefore, afoot in the second half of June, 2015 to reach a compromise between Greece and its major lenders namely the EU, the European Central Bank and the International Monetary Fund. Talks at technical and ministerial level having failed to make headway, the complex issue was referred for a decision at the summit level. A final proposal tabled by the Greek side was acknowledged by its interlocutors as offering good prospects of reaching a decision by Euro zone leaders in Brussels.

An agreement would provide a lifeline to the sputtering Greek economy, and another “last Chance” to put its house in order. A lack of consensus could on the other hand trigger the dreaded default leading to convulsions in the Euro zone and repercussions on a global scale.

A possible Greek default is not the only crisis haunting the European leaders. Another difficult member, the United Kingdom has been demanding renegotiation of European treaties in time for a national referendum on whether or not to stay in the European Union.

The general elections held in Greece and the United Kingdom this year produced results that carry serious implications for the future of the European Union in short as well as long term. The Greek voters brought the left-wing Syriza to power, hoping to do away with the austerity measures imposed after the collapse of its banking sector that have led to widespread economic hardship and soaring unemployment.

The Conservative Party led by David Cameron strengthened its hold on power and set about fulfilling its promise to renegotiate the terms of Britain’s membership of the EU, notably the automatic access of citizens from other member countries to the country’s welfare benefits.

Situated on the southern and northern flanks of Europe, the two countries’ political economy has been shaken by developments linked to institutional arrangements within the Union.

On surface, the prospect of Greece leaving the Euro zone – Grexit or Britain walking out of the Union – Brexit may look odd as both draw considerable advantages from their membership of the EU. It is, therefore, important to contextualize the cases of Greece and the UK, by first reviewing what the European Union stands for in the 21st Century.

A multi-layered supranational association of 28 sovereign states, the EU has a total of 500 million inhabitants, representing only 7.3% of the global population. Yet, it generates almost a quarter of the world’s GDP.

The global soft power of an integrated Europe grew with time by virtue of several groups of European nations merging into a single market and adopting a common trade regime in the earlier phase and subsequently by the exercise of a common foreign and security policy. Europe also extends its influence by maintaining basic standards of democracy and human rights by EU members and pressing for similar criteria across the world.

A set of treaties ensure the free movement of people, goods, services, and capital among the EU members. They also cover common criteria to enact legislation in justice and home affairs, and maintain common policies on trade, agriculture, fisheries and regional development.

Additionally, within the Schengen area, passport controls have been abolished. The monetary union led to the establishment of the European Central Bank and the launch of single currency of Euro among 18 members. The Union maintains permanent diplomatic missions throughout the world. In order to make its diplomacy more effective, the EU now has its own external affairs cadre.

You may be thousands of kilometres from Europe but be sure your life is impacted by the European Union. Europe is the single largest free trade area with a common external tariff. Restrictions such as anti-dumping measures can have major repercussions as Pakistan experienced a slide in exports of bed linen some years ago.

Similarly, a trade concession can boost production and investment of the exporting countries as seen in the grant of GSP plus status to Pakistan from January, 2014.

The EU plays an important role in global negotiations on trade, development and climate. Any common position adopted by 28 states and supported by other like minded western countries can have a considerable weight on difficult parleys.

The Union is also a major source of economic and technical assistance to the developing countries. Assistance through the European Commission combined with bilateral aid by major EU members make Europe the biggest source of development aid.

The soft power exercised by the EU through trade, aid and a common foreign policy is in contrast to the hard power exerted by its member states but they agreed at the very inception of the European Communities in the Treaty of Rome (1957) that the collective system shall promote cooperation and integration through peaceful rather than military means.

The EU was thus destined to be a non-military organization. The institutional shortfall in Europe’s hard power is, however, made up through the North Atlantic Treaty Organization- NATO, also located in Brussels. Most EU countries are also members of NATO, a military alliance that has been used to deploy western power in countries like Serbia, Kosovo, Afghanistan and Iraq. NATO, which was supposed to have lost its raison d’etre after the Warsaw Pact collapsed, has on the contrary survived and thrived. Under US leadership, it quietly took over command of the UN mandated International Security Assistance Force- ISAF in Afghanistan. This action caused dismay in Moscow and Beijing because Washington practically turned the US-led NATO into a quasi military wing of the UN, weakening the world organization’s traditional role of peacemaking or peacekeeping.

Some European countries were uncomfortable with NATO’s new vocation. Germany in particular declined to be part of combat missions in Afghanistan. Meanwhile NATO is being used to coordinate action against piracy and transnational crime including terrorism. Well before the UK and Greece joined the common European system, six founding members (Belgium, Netherlands, Luxembourg, Germany, France and Italy) had begun with the European Economic Community also known as the Common Market under the Treaty of Rome of 1957.

After several phases of expansion, the EU membership presently stands at 28. The first phase of expansion took place in 1973, with Denmark, Ireland and the United Kingdom, taking the membership to nine. Greece joined the EEC in 1981, while Portugal and Spain had to wait till 1986. All three were admitted after the end of dictatorships thereby fulfilling the fundamental criterion of democracy to join the union.

The gradual process of creating a single market was completed in 1993, with the four freedoms of: movement of goods, services, people and money. The name European Union was formalized with the Treaty of Maastricht in 1993.

In 1995, the neutral countries of Austria, Sweden and Finland joined the Union followed by the institution of a common security and foreign policy. Several countries on the EU’s eastern and southern periphery pressed for membership as the surest way to a prosperous and peaceful future. These included some former Soviet Republics and communist states, having embraced democracy after the collapse of the Soviet Union.

Consequently, the largest expansion of EU history took place in 2004, with Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joining the Union. Bulgaria and Rumania followed suit in 2007 and Croatia in 2013. Some of the members were not fully eligible for EU membership or to join the common currency launched in 2000. The Greek entry into the EEC in 1981 faced opposition but was allowed nonetheless on emotional grounds with the French President Valery Giscard d’Estaing pleading that the mother of the western civilization could not be kept indefinitely waiting at the EEC’s door.

Though admitted in the common monetary system of Euro, countries like Spain, Portugal, Italy and Greece were to face financial crises in later years in a period of a global banking crunch.

As the Union moves to celebrate the 60th anniversary of its inception through the Treaty of Rome (1957) in two years time, it faces some formidable challenges. Most pressing among these is the ballooning debt crisis of Greece, now acknowledged as the sick man of the EU with a cumulative debt that represents 175 percent of its GDP.

The Greek financial crisis has gone from bad to worse in the last five years and has reached a stage where doomsday scenarios became legion. C J Polichroniou, a political economist wrote in May, 2015 that Greece was going through “an economic and social catastrophe of unparalleled proportions”. According to him, Greece had entered a monetary union in which it was not fit to compete (Counterpunch.org).

In this analysis, after Greece joined the Euro, its political elite took advantage of the cheap borrowing costs and engaged in reckless spending, pushing debt and deficits to unsustainable levels. Polichroniou blames irresponsible European leaders and predatory financial institutions for the debacle by lending hundreds of billions of Euros to a country that was already posting the highest debt to GDP ratio in Europe.

The bailout package that was put together in 2010 by the IMF, the European Commission and the European Central Bank was designed primarily to pay Europe’s banks and prevent the breakup of the Euro zone. It was not meant to rescue the Greek economy thereby sowing the seeds of another crisis. While Greece continued to pay the loans, the policy measures took unemployment to 25 per cent.

After five years of hardships, the Greek people voted into power the Coalition of the Radical Left (Syriza) which has taken a stand against austerity and the bailout terms. However, months of arduous negotiations between the Syriza government led by premier Alexis Tsipras have failed to bring an end to austerity measures as EU negotiators led by Germany are unrelenting on lifting austerity measures for the fear of the problem spreading to the rest of southern Europe.

Eurozone leaders blocked the release of bailout funds for Greece, causing a huge liquidity crisis, in an attempt to force the Syriza government to accept a new agreement. After weeks of inconclusive talks, on June 17, 2015 the Greek central bank warned that the country could leave the Euro zone.

The Bank of Greece said that failure to reach an agreement would lead initially to a Greek default and ultimately to the country’s exit from the Euro area and most likely from the European Union. The Greek frustration was made public as negotiations over the release of the last $8.1 billion in rescue funds from the bailout package from the IMF, European Commission and European Central Bank were deadlocked as the payment deadline of June 30 neared.

The Bank of Greece also warned that if the country left the Euro zone, it would lead to a deep recession, dramatic decline in incomes and further unemployment.

Austerity measures adopted under the creditor advice brought cuts in social spending, salaries and pensions. Yet, the financial crisis shows little sign of improvement. While most critics contend that Greece should further cut its social spending, Conor Lynch says: “The true problem with Greece is as much cultural as it is economic, and the problem of corruption runs deep. Greece has a very long history of corruption and tax evasion”. (Counterpunch.org)

Greek hopes of a partial write-off of debt have not been fulfilled despite hints by the Euro zone ministers three years ago, in return for reforms. With time, this measure has become unpopular in Greece’s Euro zone partners, especially Germany. The IMF warned that there could be no deal unless Greece met the debt repayment schedule of end June.

Germany, the most important member of the EU and the Euro zone made efforts to persuade the Greek government to commit to reforms as the only way to keeping Greece in the monetary union. The head of Germany’s central bank, Jens Eidmann expressed the view that a Greek exit from the Euro zone would change the character of the monetary union but not destroy it.

Underscoring mounting global concern about the fallout from the crisis, the US Federal Reserve Chair Janet Yellen warned the world economy could see significant disruptions if Greece and its creditors failed to reach a deal.

While taking a tough stance against radical reforms and spending cuts suggested by the EU partners, the Greek premier sought to widen his options by visiting Russia in the third week of June to attend an investment forum chaired by President Putin. The strategic implications of a Greek exit have weighed heavily on European calculations, with fears that Russia could increase its leverage in southern Europe amid the crisis in Ukraine.

The contrast between a casually dressed Tsipras and his EU counterparts in dark suits is striking. While they continued to calculate the cost of Greek default, Tsipras urged them to show solidarity and support. The challenge is taking a new turn as the EU rich have to weigh the prospect of a financially weak Greece seeking help from Russia. As if to underscore that point Russia and Greece signed an accord to extend the gas pipeline TurkStream to Greece bypassing Ukraine to supply Russia’s gas to southern Europe.

Grexit as Athens’s withdrawal from the Euro is called, is matched by Brexit, the fear of a British exit from the Union that could be triggered by a continuing influx of migrants from new EU members causing an extraordinary burden on Britain’s generous welfare system.

Prime Minister David Cameron made a quick tour of selected European capitals following his re-election in May, 2015 to caution his counterparts that failing a review of the UK’s terms of membership, his country might have to quit the European Union. The final decision would be taken after a national referendum set for 2017 whereby the UK voters will be asked to pronounce themselves on the country’s continued membership of the EU.

The British have often expressed doubts over the EU. However, it was the spectacular expansion of the membership following the collapse of the Soviet Union that has caused their frustration to overflow. The steady migration of Poles, Czechs, Romanians, Bulgarians and others have led to problems of assimilation and an extraordinary burden on the welfare system.

Cameron’s Conservative Party has traditionally been against moves for greater integration or what some Europeans like to call ‘ever closer union’. They have become more skeptical of those moves after the trouble in the Euro zone particularly after the financial crisis in Greece.

Though outside the zone, Britain cannot remain aloof from the additional burden on other member states.

The question proposed in the draft legislation is: “Should the United Kingdom remain a member of the European Union?”

Polls since the start of the year have shown support in Britain for remaining in the EU to be between 37 and 49 per cent – higher in almost every survey than the desire to leave, which has ranged from 34 to 44 percent. As the Union’s largest member, Germany plays a leading role in developing consensus on most issues. Its role within the monetary union with the Euro as common currency is even more critical.

Germany also bears the largest share of the burden imposed by bailout packages for Greece. In a recent poll, 51 % Germans signaled preference for Greek exit from the Euro zone rather than paying more for salvaging that country’s debt ridden economy.

This explains Germany’s tough stance in the latest round of negotiations with the Greek government led by Tsipras claiming that they have a mandate to lessen widespread hardship rather than surrendering to the creditors. Chancellor Merkel is well aware of the sense of fatigue in Germany to make further sacrifices to bailout a spendthrift Greece. There is a strong sentiment in Germany that Greece should follow other Euro zone members – Spain, Portugal, Ireland – in reforming its economy to come out of a crippling debt crisis.

Germany is sympathetic to prime minister Cameron’s case about the extraordinary burden on the British exchequer by welfare payments to an ever rising number of EU migrants in the UK. Therefore, Germany is likely to support special measures to restrict automatic access to social welfare by new migrants. However, the Germans insist that there can be no change in the basic freedom to move and work within the EU.

Germany is prepared to go the extra mile to help Britain stay in the EU. The German leaders believe that it is important to retain Britain for a healthier power balance in the Union. They have also noted that Cameron’s new team reflects a desire to stay in the Union but he has decided to seek popular endorsement for his policy through a referendum.

Cameron belongs to the group of British leaders who realize that Britain would lose a lot, notably trade benefits by leaving the EU. London’s status as a financial hub might be affected by a withdrawal from the Union. Traditionally, Britain has received more than what it should get from the EU. There is an additional risk at this stage as the Scots are strongly pro-EU. A ‘no’ vote in the referendum is likely to strengthen demands for an independent Scotland remaining part of the EU.

Shada Islam, a specialist in EU affairs says: “The bloc looks set to enter another period of deep introspection on its future direction, main concerns and general raison d’etre.” According to her, many countries are sympathetic to Britain’s demand of an overhaul of the EU – but do not want another long, difficult and complicated treaty negotiation.

“First Britain wants to opt out from the EU’s ambition to forge an “ever closer union” of the peoples of Europe. It wants to restrict access to the British labour market of EU migrants. Cameron says Britain would resist any move towards a European army and has ruled out Britain joining the Euro. The Brussels-based analyst feels that the other EU members would like Britain to stay but are frustrated with the tone and content of the toxic British debate on Europe (Dawn).

The twin crises of Greek debt and British contention underscore difficult challenges in a smooth functioning of a union of 28 sovereign states with their specific priorities and ambitions. A decade ago, the former Belgian premier Guy de Verhofstadt had strongly argued that the way forward was a federal Europe a la United States of America. That view probably has fewer supporters today than it had then.

Verhofstadt belongs to a generation that inherited the European ideal from the founding fathers of a uniting Europe. The younger generation have faith in the Union as it enables them to share a bigger pie and enjoy the freedoms of travel, work and free trade while basking in the soft power of the EU. They are less idealistic and more blasé about an “ever closer union”. There is not much appetite for the United States of Europe as the EU is increasingly accepted as a voluntary association of nation states without the bounds of a federal system.

 


The author is a former ambassador of Pakistan.