Europe
5:20 pm
Wed June 27, 2012

As Leaders Meet To Save Euro, Nations Face Trade-Off

Originally published on Thu June 28, 2012 4:37 pm

Over the next two days, European leaders will gather for yet another critical summit in Brussels. They'll try to come to an agreement to boost European growth, save Spanish banks and relieve financial market pressure on Spain and Italy. Each national leader will also face a trade-off that involves sacrificing sovereignty to get economic stability.

Stephan Richter, publisher and editor-in-chief of the online magazine The Globalist, calls this "a true Primo Levi moment," referencing the Italian writer who survived the Holocaust and wrote the novel If Not Now, When?

"If not now, when will we do the right thing?" asks Richter, who says the right thing for those who want to save the euro and steady Europe's wobbly economy is to get on with the task of bringing nations closer together in a sort of United States of Europe.

Germany Balks

This week a group of European heavyweights, including Mario Draghi, president of the European Central Bank, presented the leaders with a 10-year plan to create a stronger union between the European nations.

The plan calls for taking immediate steps toward a genuine economic and monetary union, including the creation of Europe-wide banking regulation and deposit insurance and the sharing of the region's debt burden.

France, Italy and Spain support the plan. But Germany, which would end up holding the bag for Europe's bad debt, continues to balk.

Richter predicts German Chancellor Angela Merkel will insist that other countries demonstrate they're making real reforms to improve their economies and show her they're willing to surrender significant control over their national budgets — the power most dear to national parliaments — to federal institutions in Brussels.

Jacob Kirkegaard of the Peterson Institute for International Economics says that amounts to surrendering sovereignty, which nations seldom do willingly.

"Historically, this has always been associated with the direct threat of military invasion, or in the case of the euro area, the direct threat of a financial and political calamity," Kirkegaard says.

Creating A Road Map

Europe is facing its share of financial and political turmoil right now. Mutualizing the euro area's debt so that each country's share would be backed by its partners would ease the worries of the financial markets.

But Kirkegaard says such a grand bargain is "simply politically impossible." On Tuesday, Merkel told German lawmakers in a meeting: "I don't see total debt liability as long as I live." She added that the pooling of debt could come only with improved oversight and concessions on sovereignty.

Kirkegaard says European leaders will instead create "a road map for how this could happen." The plan would gradually pool national debts as governments gradually give up sovereignty.

But that process will take time, and the financial markets are looking for tangible moves now.

A Point Of No Return?

Nicolas Veron, a senior fellow at Bruegel, a Brussels-based think tank, says the markets are likely to get a big step toward a banking union with the creation of a sort of FDIC, or Federal Deposit Insurance Corp., for Europe.

"The number of pronouncements that have been made in the past weeks by most leaders in Europe signals that the discussion about [a] European banking union is real," Veron says.

He suggests the leaders immediately announce that the European Union's emergency fund, the European Financial Stability Facility, backs the deposits of all eurozone banks.

"It would be a game-changing event in terms of market perceptions of whether the European Union leaders are serious or not about banking unions," Veron says.

The idea may look too much like pooling debt to Angela Merkel. But in the end, Kirkegaard thinks Europe will come together because it has reached the point of no return with the euro.

"It is now infinitely more costly for everyone in Europe to abandon the project than it is to complete it," he says.

Abandoning the euro project would be most costly for the Germans. Its banks are already among Europe's largest creditors. And maybe more importantly, since World War II the country has seen its future in a united Europe.

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

MELISSA BLOCK, HOST:

This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.

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And I'm Audie Cornish.

Over the next two days, European leaders will meet in Brussels. They'll try to come to an agreement on how to boost growth, save Spanish banks and relieve financial market pressure on Spain and Italy.

As NPR's John Ydstie explains, each leader at the meeting will have to face the tradeoff of sacrificing sovereignty in order to gain economic stability.

JOHN YDSTIE, BYLINE: Stephan Richter, publisher and editor of TheGlobalist.com, sums up the leaders' challenge this way.

STEPHAN RICHTER: We are at a true Primo Levi Moment - the famous Italian writer who wrote: If not now, when. If not now, when will we do the right thing?

YDSTIE: Richter says the right thing for those who want to save the euro and steady Europe's wobbly economy is to get on with the task of bringing the nations of Europe closer together, in a sort of United States of Europe.

This week, a group of European heavyweights, including Mario Draghi, president of the European Central Bank, presented the EU leaders with a 10-year plan to achieve that. It calls for taking immediate steps toward a genuine economic and monetary union. At the top of the agenda, creating Europe-wide banking regulation and deposit insurance, and sharing the region's debt burden.

The plan is backed by France, Italy and Spain. But Germany, which would end up holding the bag for Europe's bad debt continues to balk.

Again, Stephan Richter.

RICHTER: We will see Angela Merkel reprising the role of Harry Truman. She says, number one, show me - talk ain't good enough. And number two, the buck stops here.

YDSTIE: The German Chancellor will insist that other countries demonstrate they're making real reforms to improve their economies and show her they're willing to surrender significant control over their national budgets; the power most dear to national parliaments, surrender it to federal institutions in Brussels.

Jacob Kirkegaard, of the Peterson Institute for International Economics, says that amounts to surrendering sovereignty, something nations seldom do willingly.

DR. JACOB KIRKEGAARD: Historically, this has always been associated with, you know, the direct threat of military invasion or, in the case of the euro-area, the direct threat of a financial and political calamity.

YDSTIE: Which is what Europe is facing right now. What the financial markets would like to see most is for all of the euro-area's debt to be mutualized. That is, each country's debt would be backed by its partners. But there won't be a grand bargain like that says Kirkegaard.

KIRKEGAARD: That is simply politically impossible.

YDSTIE: Merkel was quoted yesterday as saying, that that won't happen as long as I live. And she said the pooling of debt could only come with improved oversight and concessions on sovereignty.

KIRKEGAARD: What we will get from the European leaders is a road map for how this could happen.

YDSTIE: A plan for gradually pooling national debts as governments gradually give up sovereignty. The problem is that will take time and the financial markets are looking for tangible moves now.

Nicolas Veron, a senior fellow at Bruegel, a think-tank based in Brussels, says the markets are likely to get a big step toward a banking union, the creation of a sort of FDIC for Europe.

NICOLAS VERON: The number of pronouncements that have been made in the past weeks by most leaders in Europe, signals that the discussion about European banking union is real.

YDSTIE: Veron suggests the leaders immediately announce that the EU's emergency fund, the EFSF, backs the deposits of all eurozone banks.

VERON: It would be a game changing event in terms of market perceptions of whether European leaders are serious or not about banking unions.

YDSTIE: The idea may look too much like pooling debt to Angela Merkel. But in the end, Jacob Kirkegaard thinks Europe will come together because it's reached the point of no return with the euro.

KIRKEGAARD: It is now infinitely more costly for everyone in Europe to abandon the project than it is to complete it.

YDSTIE: And abandoning the euro project would be most costly for the Germans. Its banks are already among Europe's largest creditors. And maybe more importantly, since World War II, the country has seen its future in a united Europe.

John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright National Public Radio.