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By Paolo von Schirach
January 15, 2013
WASHINGTON – These days in Europe there is a far more optimistic atmosphere. It would appear that the big Eurozone crisis has been solved. No Greece exit. Italian and Spanish bond yields are back to tolerable levels. It seems that all problems, if not entirely taken care of, are now smaller and manageable.
Draghi’s magic
And how did this miracle happen? Well, it is all about the heroic and daring statements pledging unwavering support for the Euro made last year by European Central Bank (ECB) President Mario Draghi. He said that the Euro was and is there to stay and that the ECB has plenty of ammunition to take care of any challenges. These bold words reassured markets and inspired new confidence in the solvency of the troubled Mediterranean countries. “The ECB is in charge; so all is well”.
Really? As is easy as that? Are we to believe that the ECB is so powerful that all by itself it can overcome all the structural impediments to fiscal balance and growth that have plagued and are plaguing all the Club Med countries? This is sheer lunacy. Of course the ECB can do a lot. But, by itself it cannot reform public spending and productive activities in Greece or Spain.
Promised changes
That said, part of the new confidence in the future of the Eurozone was also predicated on reforms promised about centralized budgeting and banking supervision that now look a lot more uncertain. In other words, belief in Greece and its future solvency rests in large part on the perception that there will soon be mechanism in place that will guarantee Greek debt, no matter what. However, these mechanism, while planned and decided upon, are not yet in place. When credit markets will be convinced that credible actions did not follow talk there will be a new wave of turmoil.
Political weakness
And this is yet another example of Europe’s chronic inability to have real follow up. And this is in large part because of Europe’s political weakness. Within the EU there is an unfortunate combination between weak institutions, lack of a coherent strategy leading to a real Political Union and economic weakness affecting a number of member states. Weak institutions will have a hard time shoring up (let alone reforming) structurally weak Greece, Cyprus, Italy, Spain and Portugal.
EU: an ill defined project
Leaving aside the specifics of the implementation timetable for this or that fiscal or banking reform, Europe’s main –and conveniently ignored– problem is that it is an ill defined enterprise. The EU is far more than a Free Trade Area and far less than a Federation. It is a confused hybrid with political ambitions without political instruments and almost zero political legitimacy coming from Europe’s citizens. This is a basic, systemic weakness that limits the ability to come up with binding agreements and real follow through on commitments.
Add to this institutional and political fog the additional problems stemming from bankrupt welfare states in Europe’s periphery, out of control public spending and non competitive economies and you get the full picture.
Central Banks are no substitute for sound national policies
Mario Draghi and the ECB may have indeed a lot of fire power. But not even the best Central Banker in the world can be a substitute for well organized, cohesive and productive societies. The ECB may be able to guarantee that Greece will not implode. But it can do almost nothing to turn it into a mini-Germany. Given all this, the current euphoria about Europe’s prospects has no justification. Europe is weak and will stay weak.