The euro crisis has receded, leaving behind quite a lot of egg on (mostly) Anglo-Saxon faces. For much of 2012 the air was thick with predictions of imminent catastrophe. Brits and Americans were in the vanguard of the gloomsters. In the event, reports of the demise of the single currency proved greatly exaggerated.
The most ardent europhile would struggle to argue that European governments have met all the big economic tests. The continent still boasts precious little growth, chronic unemployment and a pile of public debt. The banks are in far from rude health, and there are political battles aplenty ahead. That said, finance ministers no longer spend every waking hour checking the spreads on sovereign debt. Private funding is flowing back towards the periphery.
It is worth exploring where the pessimists went wrong. The answers provide a clue as to the future architecture of the eurozone and the political shape of Europe.
The obvious mistake was to underestimate the political will of European leaders to keep the show on the road. Peripheral states, it was said, would not have the resolve to sustain brutal austerity measures. Riots would spread from Athens to Rome, Madrid and Lisbon. Germany lacked the domestic political support needed to underwrite the debtors.
This argument was not without merit. Greece, in particular, looked as if it was sliding out of the monetary union. Spain seemed to face an impossible task in restoring a crippled financial system. The peripheral economies were hopelessly uncompetitive. German public opinion was singularly hostile to bailing out the "Club Med” nations.
What was missing in most of the British, and quite a lot of the American, analysis, however, was an appreciation of the force of politics. The myriad efforts to support the euro have been far from elegant. Constant hesitation has raised their cost and reduced their efficiency. But behind the austerity, the bailouts and the new funding mechanisms has lain serious determination.
For many in Britain, as we heard the other day from Prime Minister David Cameron, the EU is about the single market. For the rest it is a political project – the guarantor of Franco-German reconciliation, of freedom in the former dictatorships of left and right, and of a European voice in a world where power is fast heading east. During one sticky episode last year, I heard a German official say how lucky it was Britain had stayed out of the euro. Had it joined, it would have run away again at the first whiff of cordite.
The turning point came when Chancellor Angela Merkel concluded that a eurozone collapse would risk the break-up of the EU. Germany would lose the strategic framework for its security and prosperity. It is striking how the national discourse changed within a matter of months, the conversation has shifted from "feckless” Greeks to the euro’s vital role in guarding German interests.
Merkel decided during the late summer that it was too risky to allow Greece to leave. At about the same time, she sided with the European Central Bank against the Bundesbank. Mario Draghi, ECB president, got the go-ahead to guarantee the bonds of peripheral states. Once the ECB had positioned itself as a lender of first resort, the markets were left stranded on the wrong side of an unwinnable fight.
The other mistake was conceptual – the product of dry economic theory and excessively tidy minds. The eurozone, pessimists said, faced a simple binary choice. It could become an economic and political union – a united states of Europe – or it was doomed. Since it was obvious that Germany, France and the rest were not about to abandon their national identities, it was easy to conjecture that the euro was a currency without a future.
The trouble is that what the French call the construction of Europe does not conform to existing political models. The EU marries the supranational and the national. The euro was cast in the same mould. Sure, it was a mistake not to provide for more economic integration at the outset. And, yes, sustaining the single currency will eventually require a sizeable leap towards fiscal federalism. But neither the "political union” envisaged by Germany nor the "economic government” proposed by France imagine the abolition of the nation state. Nor need they.
A soon-to-be published study by economists at the International Monetary Fund shows that even full-blooded political federations vary widely in the distribution of economic power between the central government and constituent states. Few, if any, go as far as offering the centralised guarantee of borrowing that is implied by proposals that the eurozone should issue eurobonds.
Barack Obama has grasped this. When he was briefed about German reluctance to write a blank cheque, the US president said he well understood Merkel’s reticence. After all, US states are not expected to bail out indebted neighbours.
The end point for the eurozone looks likely to be a much tighter economic union but one falling short of political federalism. Nemat Shafik, the deputy managing director of the IMF, put it well at a recent gathering in Paris of the Franco-British Colloque. Europe’s destination probably lay in the "muddy middle of variable geometry and hybrids between federal and intergovernmental solutions”.
The euro still confronts formidable political and economic challenges – though those who blame everything on the single currency must also explain why Britain is in a bigger mess. No one can be sure the currency will survive in perpetuity. History says that monetary unions often break up. But at least we know now that the politicians will not give up without a pretty ferocious fight.
Copyright the Financial Times 2013.