Brussels. The latest paroxysm of Greece’s debt crisis has exposed growing rifts in the euro zone which, unless addressed soon, could lead to the break-up of European monetary union, the EU’s most ambitious project.
The most worrying sign for European leaders is that public opinion and domestic politics are pulling them increasingly in opposing directions – not just between Greece and Germany, the biggest debtor and the biggest creditor, but almost everywhere.
Germans, Finns, Dutch, Balts and Slovaks no longer want taxpayers’ money to go to bail out Greeks, while the French, Italians and Greeks feel the euro zone is all about austerity and punishment and lacks solidarity and economic stimulus.
With central and east European states growing more assertive and the Dutch and Finns facing mounting domestic constraints, a compromise between euro zone leaders Germany and France, increasingly hard to find over Greece, is no longer sufficient to settle the problems.
There are so many stakeholders with divergent views that crisis management is becoming ever more difficult. A far-reaching reform of the 19-nation currency area’s flawed structure seems a remote prospect.
After weeks of late-night emergency meetings of leaders and finance ministers, culminating in a tense all-night summit, the euro zone produced a fragile deal to keep Greece afloat by making it a virtual protectorate under intrusive supervision.
Few, if any, of the main protagonists think it will work.
Greek Prime Minister Alexis Tsipras said it was a bad deal that would make life worse for Greece but he had swallowed it because the alternative was worse. German Finance Minister Wolfgang Schaeuble said Athens would have done better to leave the euro zone – “temporarily” – to get a debt write-off.
Chancellor Angela Merkel, Europe’s dominant leader, made clear the main virtue of the deal was to avoid something worse.
“The alternative to this agreement would not be a ‘time-out’ from the euro … but rather predictable chaos,” she said.
A senior EU official involved in brokering the compromise, who spoke on condition of anonymity, said there was now a “20, maybe 30 percent chance of success”.
“When I look at the next two to three years, the next three months, I see only black clouds,” the official said. “All we succeeded in doing was to avoid a chaotic Grexit.”
Problems are likely to resurface in late August or September when it comes to concluding the detailed negotiations on a three-year bailout programme. By then Greece’s economy may have gone further off the rails and Greeks may be heading for early elections.
The International Monetary Fund is due to make another analysis of Greek debt before a deal is concluded which may well show that only a “haircut”, or outright write-down of loans, can make it sustainable.
Schaeuble, who says a “haircut” is illegal in the euro zone, will be waiting with his Plan B for debt relief with Greece outside the currency area.
Even if the third Greek bailout in five years does not trip up at that stage, the chances of it being fully implemented and delivering an economic recovery look slim.
The Greek crisis has also widened divisions between euro and non-euro members, with Britain and the Czech Republic insisting on guarantees for their taxpayers’ money in exchange for using an EU-wide bailout fund for bridge finance.
If the Greek crisis were the euro zone’s only worry, it might be easier to isolate and resolve it, since financial markets have shown little sign of the contagion to other weak sovereigns’ bonds that threatened to tear it apart in 2012.
Greece has been such a distraction that leaders barely noted an important report authored by European Commission President Jean-Claude Juncker with the heads of four other EU institutions on how to make the monetary union work better.
That is arguably the biggest challenge facing the EU, yet there is little sign of willingness to contemplate pooling more fiscal sovereignty or sharing more common liabilities as the authors say is required.
The debt crisis that began in 2010 led to the creation of some new institutions to strengthen the currency area – a permanent bailout fund, stricter enforcement of fiscal rules, a single banking supervisor and a joint mechanism for winding down failed banks.
But German-led opposition to mutualising debt, French-led resistance to yielding more control over national budgets and the electoral rise of Eurosceptic populist parties prevented the euro area going further.
In Brussels, there is much talk of how the latest Greek crisis should prompt a leap forward in integration to strengthen the euro zone, but it’s not clear what progress is possible.
Among the quick wins suggested by the “five presidents’ report” is a common deposit insurance scheme for euro zone banks that are under ECB supervision and a fiscal backstop for a bank resolution fund being raised from the finance sector.
Whether such ideas will fly in Berlin remains to be seen. In the longer term, after 2017, the report envisages setting up a euro area treasury accountable at the European level.
French President Francois Hollande suggested this month creating a parliament for the euro zone to give decisions greater democratic legitimacy.
Such ambitious visions stand at odds with frantic nocturnal crisis management and the increasingly divisive nationalist tone of much of the debate in the euro area.