by Pauline Moullot
Last week, economists waited with bated breath for the results. Would the German parliament actually approve an expanded bailout fund for Greece? The expansion of this fund could buy some more time for Greece as it teeters on the edge of default, which could plunge the Greek (and some fear Europe’s) economy into a deep recession. Faced with fiscal disaster, Eurozone countries have been enacting a “kicking the can forward” policy, but with little public support in Germany, even this vote was a significant hurdle. Instead of stalling and doing the bare minimum to hold the Eurozone together, the Eurozone needs to use this crisis as an opportunity to turn itself into a nimble, pan-European financial union.
Luckily for Europe, the German vote wasn’t even in close. When the German parliament voted last Thursday on the expanded European Financial Stability Facility (EFSF), parliamentarians voted in favor of the expansion 523 to 85. This expansion is slated to give the EFSF 440 billion euros ($600 billion), up from 225 billion euros. It also increases the Eurozone’s flexibility, allowing it to recapitalize banks and purchase bonds in the secondary market. Hopefully, this is the beginning of a real solution.
The German parliament’s decision to help the Greek economy sends a signal that it will do what it takes to stem the crisis, says Mathieu Plane, economist at the French Observatory for the Economic Situation (OFCE). “Everything is not solved yet, but we can be confident when Germany wants to avoid a Greek restructuring; it ends the threat of a crisis spreading to the rest of Europe,” he says.
German support was uncertain a few days ago. A whopping 70 percent of Germans opposed the vote. German taxpayers didn’t want to pay Greek bankers. Now, Germany's contribution to Greece has gone from 123 to 211 billion euros. This decision is a good sign for European unity as Germany seems more willing to play a pan-European leadership role. Its politicians ignored the desires of its own people to reach out and help the rest of Europe.
But the fight isn’t over yet. The rigid Eurozone rules are preventing Europe from rescuing itself, and Germany’s support isn’t enough. While most of Europe decided to expand the fund in July, three more Eurozone countries still need to approve it. The Slovak parliament could scuttle the whole deal. Even with Germany on-board, the need for a unanimous vote increases uncertainty and wastes valuable time. The Slovak parliament—a potential fund opponent—isn’t supposed to vote until mid-October. Europe shouldn’t have to depend on the vicissitudes of Slovak politics to prevent an economic collapse. To keep the euro, the Eurozone needs to reform.
Germany should be applauded. The time has come for the European nations to think of Europe first and their own nations second, but without a pan-European Treasury, the Eurozone, is structured to discourage this. Without central, efficient guidance, even Germany’s decision to step up will not be enough. Countries have to risk losing some sovereignty and start thinking as other countries as partners.Europe’s approach to the potential collapse of the Greek economy provides an opportunity to fix what ails the Eurozone, and for starters, it needs to rid itself of the need for unanimity.
Just about everyone agrees the Eurozone needs reform. It’s how it should be done that’s the problem, and if specific reforms need a unanimous vote, then the Eurozone will be hard pressed to save itself. All week European economists feared the German vote. And now that they breathed a sigh of relief with its passage, they may have to go through another period of uncertainty as they wait for the Dutch and Slovak vote. If decisions could be made without waiting for every single country—say through a pan-European Treasury—the crisis could be dealt with much more quickly, and it would help remove some uncertainty in the markets.
Even if the fund expansion passes as it’s expected to do, the EFSF would only be a band aid. In order to stop the crisis from spreading, one needs to prove to the market that countries are willing to implement deeper changes to their economies, and it needs to happen soon. As Michel Guillard a professor of Economics of Evry University says, "We need to convince the markets that Europe will implement austerity measures in the future, but the problem is how can we convince them that we will do something we haven't done yet?"
Aperfect solution to the crisis does not exist, but the system can be changed to ensure greater efficiency and to prevent one nation from blackmailing the rest. "Today we see that a country like Germany can destroy the euro if it wants to," says Plane. While Germany decided this time to try saving the Eurozone by ratifying the EFSF expansion, no one can be sure it will keep acting in Europe’s best interest. As Europe’s largest economy, Germany should take responsibility for the rest of Europe, but the Eurozone needs to be constructed so that no one country, not even Germany, can dismantle it or stall important legislation.
The consequences of a failed Eurozone aren’t just financial. As Jean Pisani-Ferry, director of the Bruegel institute in Belgium, told Le Monde, "The political consequences for Europe would be really serious. A violent divorce is not the right ground for future serene relations."
The problems facing Greece are serious, and a default would hurt all of Europe. The Eurozone needs to act swiftly, and to do that it needs to change its structure, starting with removing the need for unanimous votes.
"In the end, if we look further than political and electoral issues, it looks clear that even Germany would suffer from a Greek default,” says Plane. If Europe takes advantage of the crisis, reforms itself, and proves that the Eurozone stands together in the face of crisis, then it will not just be a monetary alliance, but a true economic powerhouse. Europe can’t afford to let this crisis go to waste.
Pauline Moullot is an editorial assistant at World Policy Journal.
[Photo courtesy of Flick'r]