The recovery of the American economy has slowed, and the collapse of the Euro — a financial crisis in Europe — could tip the United States into the feared double dip of recession. Ironically for the Obama Administration, the greatest threat to the president’s re-election comes not from Afghanistan or Yemen, but from our allies in Europe.
What are the prospects of a collapse of the Euro? On Wednesday, 20,000 Greeks rioted in Athens in opposition to the austerity measures that are required to meet the conditions for payments from the $600 billion European Financial Stability Facility. As one observer noted, “there is no sign of a national spirit of sacrifice to save the country.” And although the German Bundestag voted on September 29 for an expanded bailout fund, there is still resistance in Germany to allowing the European Central Bank to issue Eurobonds or act as an unlimited lender of last resort to prevent the contagion of loss of confidence spreading from Greece to the sovereign debt of Portugal, Ireland, Spain, and Italy (as well as to the Northern European banks that hold much of that debt.) Markets believe that the EFSF is too small to deal with the problem, but German Finance Minister Wolfgang Schauble says “we do not have the intention” of enlarging the emergency fund.
Some economists predict a costly break-up of the Euro followed by a collapse of economic activity in Europe. Some pointed out when the Euro was created a decade ago that the logic of economics argues against trying to manage a common currency without a common fiscal policy, and European states are not ready to give up that degree of sovereignty.
Yet there is also a logic of long-term politics at work in Europe. Unlike Asia, where the divisions of 1945 remain to this day, a political process of integration has tied Europe together in a way that means that the bitter conflicts of the past are unlikely to recur. The process was launched by the Schuman Plan for a Coal and Steel Community, followed by the European Common Market, and then at the end of the Cold War came German agreement to French demands for a common currency as a quid pro quo for allowing German reunification. Younger generations may not remember this history as clearly as older politicians, but there is a reluctance of political elites to see all this unravel. No political leader wants to be held responsible by history for undoing this process.
Thus far this politics has led to a series of inadequate agreements that have allowed Europe to muddle through without solving the crisis. Europeans hope to have proposals for strengthening the EFSF by the time of the G-20 meeting in Cannes in November, and Mario Draghi, who takes over as president of the European Central Bank this month may increase its purchase of sovereign debts. But many fear that these steps will fall a Euro short and a day late.
Americans can do little about this threat. Secretary of the Treasury Timothy Geithner has traveled to Europe and pleaded for more drastic actions, but it is Europeans who must decide. At this point, we must hope that Europe succeeds not only because of the short term economic effects but also because of the implications for Europe’s pioneering role in creating international institutions. If Europe fails, we will all be the poorer, both economically and politically.