Tag Archives: eurozone

Austria

Meet Austrian chancellor Werner Faymann, Europe’s Superman of Keynesian economics

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austrianeconomics

Austrians go to the polls on September 29, and just as with Germany’s election last weekend, voters seem inclined to reward a government that has largely kept Austria’s economy strong through a time of recession and unemployment throughout much of the rest of Europe.austria flag

But German chancellor Angela Merkel has steered a largely moderate, pragmatic course over the past eight years in Germany, and it’s arguable that Germany’s economic success owes much to its position as Europe’s largest economy and its role as a leading global high-tech manufacturer than to any Merkel-era economic policies — if anything, Merkel’s center-left predecessor Gerhard Schröder pushed through the policies (including the Hartz IV labor and welfare reforms) that steeled Germany for the economic storm of the late 2000s and early 2010s.

In Austria, however, it’s been an even more sanguine story.

The country has a 4.8% unemployment rate, according to Eurostat, the lowest among all 27 countries in the European Union.  Its GDP dropped just 3.8% in 2008 (a narrower drop than in Germany), and it returned to growth thereafter — even in 2012, it managed to record GDP growth of 0.8% while most of the eurozone was mired in recession.

So what has Austrian chancellor Werner Faymann and his government done over the past five years in order to steer Austria out of the straits of the eurozone morass?  As it turns out, a lot.

While several European countries have served as battlegrounds for harsh transatlantic battles among economists over economic policy (the usual suspects, but also places like Iceland, Latvia and Estonia), you would think that neo-Keynesian economists would be shouting from the rooftops about Austria’s economic stewardship.  Don’t confuse Austria’s economic policy today with Austrian economics, as such, which is something very much the opposite.

Since his election in September 2008, Faymann has led a grand coalition between his own center-left Sozialdemokratische Partei Österreichs (SPÖ, Social Democratic Party of Austria) and the center-right Österreichische Volkspartei (ÖVP, Austrian People’s Party), and it’s about as anti-austerity a government as Europe has seen.

Given the strength of the Austrian labor movement, Austria immediately pursued the kind of work-sharing policies that Germany also adopted in the aftermath of the crisis when aggregate demand tumbled — the idea that shorter working hours for everyone would be a way to disperse the slack in the economy, thereby avoiding the wave of layoffs that we saw in the United States.

But Faymann also pushed through job training legislation that massively empowered Austria’s Arbeitsmarktservice (AMS, Austrian Employment Service), including strong benefits for the unemployed and the guarantee of a paid training internship for young Austrians in the marketplace.  Austria’s labor market has performed exactly the opposite of that in the United States — unemployment rose in Austria because more workers were seeking jobs, while the US unemployment rate has dropped partly because so many American workers have given up on finding employment.

Faymann also allowed Austria’s public debt to rise from around 60% in 2008 to 75% today in order to finance the jobs legislation and other stimulative measures to shore up Austria’s economy.  His government also took the lead in convincing the European Union and the International Monetary Fund to provide up to €125 billion to stabilize banks in the Central European and South Eastern European (CESEE) region, a strategy that worked to reassure global investors.  A financial panic in CESEE region countries, such as Hungary, would have led to massive losses for Austrian banks as well.  The idea is that a credible commitment from government at the outset of a financial crisis will stave off a larger financial panic.  Contrast the far less proactive European response to the wider sovereign debt crisis — it was only in July 2012, the eurozone crisis’s third year, that European Central Bank president Mario Draghi said he would do ‘whatever it takes’ to save the euro.

Faymann is campaigning on a platform of instituting a wealth tax on millionaires and institutionalizing a levy on the assets of large banks, both of which Faymann hopes will keep income inequality relatively low in a society that already has one of the world’s lowest Gini coefficients.

With a record like that, why isn’t Paul Krugman cheerleading for Faymann from the op-ed pages of The New York Times?  Here’s a European leader who has pursued as close to a Krugmanite economic policy as anyone.

For one, you could easily argue that Austria’s just been lucky.   Continue reading Meet Austrian chancellor Werner Faymann, Europe’s Superman of Keynesian economics →

Germany, United States

That ‘transcending ideology’ thing from Obama 2008? Angela Merkel did it. Obama hasn’t.

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merkelobama

Last Sunday’s election wasn’t just a victory for the German center-right — it was a very personalized victory for Germany’s chancellor, Angela Merkel, who will become just the third postwar chancellor to serve three terms.*  USflagGermany Flag Icon

Germans largely saw Merkel as the only viable chancellor candidate (sorry, Peer Steinbrück!), and they flocked to support Merkel for steering Germany largely unscathed through a global financial crisis and a subsequent eurozone crisis in an export-oriented economy that’s still growing and producing jobs for Germans.  They admire the fact that she’s steered the eurozone through the worst of its sovereign debt crisis and avoided the single currency’s implosion, all while tying bailouts for Greece and other Mediterranean countries to austerity and reform measures that would make more profligate countries (like Greece) more ‘German’ in their approach to state finances.

But beyond the infantilizing ‘Mutti’ meme or the idea that Merkel represents a ‘safe pair of hands,’ she has won over many Germans because she’s been such a pragmatic and non-ideological leader.  Though Merkel leads the ostensibly center-right Christlich Demokratische Union Deutschlands (CDU, Christian Democratic Party), it’s really hard to know what the CDU stands for these days other than the continuity of another Merkel government — and that’s likely to pose a difficult challenge for Merkel’s successor in 2017 or 2021 or whenever.

Merkel’s made some ideological compromises to her Bavarian counterparts, the Christlich-Soziale Union in Bayern (CSU, the Christian Social Union)  — for instance, she has avoided the question of marriage equality, preferring that the German constitutional court largely deliver equal rights and benefits to same-sex partners at a time when both conservative governments (in the United Kingdom) and leftist governments (in France) deliver legislative solutions.

By and large, though, Merkel eschews ideological litmus tests.  Merkel campaigned on an economic agenda that varies only slightly with that of her rival center-left Sozialdemokratische Partei Deutschlands (SPD, Social Democratic Party).  While the SPD favored a €8.50 minimum wage, Merkel pushed a sector-by-sector minimum wage approach.  Both parties supported increasing elements of the German social welfare model, such as child allowances and a rise in pensions.  While the SPD and other leftists pushed for tax increases, Merkel has been content to draw a line at merely no tax increases, to the disappointment of Merkel’s liberal coalition partners, the Freie Demokratische Partei (FDP, Free Democratic Party), who were completely wiped out of Germany’s parliament in Sunday’s elections.  After the nuclear meltdown of the Fukushima reactor in Japan in 2011, Merkel announced that Germany would phase out nuclear energy, thereby accomplishing in one fell swoop one of the German left’s top priorities since the 1970s — and perhaps the top policy goal of the Die Grünen (the Greens).

German political scientists refer to it as ‘asymmetric demobilisation‘ — Merkel has so blurred the lines between her position and the SPD position that on the top issues — economic policy, Europe, foreign affairs — the SPD can’t draw an effective contrast to her.

Merkel, in essence, has governed as a perfectly non-ideological leader.

Sound familiar?

It should to most Americans, who elected Barack Obama in 2008 in large part due to his pledge to transcend the increasingly polarized politics of the United States.  Here’s what Obama said upon accepting the Democratic Party’s nomination for president that summer:

America, our work will not be easy. The challenges we face require tough choices, and Democrats as well as Republicans will need to cast off the worn-out ideas and politics of the past…. For eighteen long months, you have stood up, one by one, and said enough to the politics of the past. You understand that in this election, the greatest risk we can take is to try the same old politics with the same old players and expect a different result.

In effect, Merkel has done, in her quiet and unassuming way, what Obama has utterly failed to do — govern in a way that transcends traditional ideological divides.

You could say that Obama’s rhetoric is the standard boilerplate that any change candidate serves up in American politics — the same ‘Washington-is-not-the-answer’ tropes that Republicans and Democrats have rolled out since Ronald Reagan swept to power 33 years ago on an appealing anti-government message.  But Obama’s reputation in 2008 came mostly from his keynote address to the 2004 Democratic national convention on this precise issue:

Yet even as we speak, there are those who are preparing to divide us, the spin masters and negative ad peddlers who embrace the politics of anything goes. Well, I say to them tonight, there’s not a liberal America and a conservative America — there’s the United States of America. There’s not a black America and white America and Latino America and Asian America; there’s the United States of America. The pundits like to slice-and-dice our country into Red States and Blue States; Red States for Republicans, Blue States for Democrats. But I’ve got news for them, too. We worship an awesome God in the Blue States, and we don’t like federal agents poking around our libraries in the Red States. We coach Little League in the Blue States and have gay friends in the Red States. There are patriots who opposed the war in Iraq and patriots who supported it. We are one people, all of us pledging allegiance to the stars and stripes, all of us defending the United States of America.

So there’s a lot of reason to believe that Obama genuinely believed he could transform the political dynamic in American politics.

But his absolute lack to do so is perhaps Obama’s greatest failure as a president.  Say whatever you want about his policies, the Obama era in many ways constitutes a high-water mark for American political polarization.  Republicans now lean even more to the right, in the thrall of a tea party movement that demands no compromise from Republican officeholders.

There are all sorts of rationales that explain why Merkel has succeeded in becoming non-ideological and why Obama hasn’t — but none of them are completely satisfying.  Continue reading That ‘transcending ideology’ thing from Obama 2008? Angela Merkel did it. Obama hasn’t. →

Germany

Your weekend cocktail-party glossary for the German election

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Plakate zur Bundestagswahl

You’ve mastered the Syrian chemical weapons crisis, you’re ready for the showdown over the US government shutdown and the debt ceiling fight, and you’re ready to hit the party circuit this weekend, wit and pith at the ready.Germany Flag Icon

But wait! You’ve forgotten that Germany, the most populous and arguably the most important country in Europe, is going to the polls on Sunday to elect a new government.

You know that Angela Merkel, Germany’s chancellor for the past eight years, is likely to return for a third term chancellor, even though it’s less clear which governing parties will join her in coalition.

You know that her center-right Christlich Demokratische Union Deutschlands (CDU, Christian Democratic Party) holds a wide, double-digit lead over the center-left Sozialdemokratische Partei Deutschlands (SPD, Social Democratic Party).

And you know that, as far as elections go, it’s been a particularly boring one — even by the standards of Germany’s relatively muted consensus-driven politics.

But what else should you know about Sunday’s election?

Not to worry.  Here’s all the lingo you need to sound (and be) in the know about what’s likely to happen this weekend in Germany — and what might happen in its aftermath. Continue reading Your weekend cocktail-party glossary for the German election →

Latvia

Despite risks, Latvia (and all the Baltic states) still wants to join the eurozone

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latviajoins

Latvia was formally accepted yesterday as the 18th member of the eurozone, meaning that on January 1, 2014, it will join Estonia as the only former Soviet republic to have adopted the euro as its currency.latvia

That might be surprising given that, in the wake of the 2008 global financial crisis and, in particular, the ensuing eurozone sovereign debt crisis, the eurozone has not been the most popular club.

Malta and Cyprus joined at the beginning of 2008 (we know how well that worked out for one of them), Slovakia joined at the beginning of 2009 and Estonia followed in 2011.  But though Croatia recently joined the European Union to much fanfare, and though other Balkan nations are anxious to follow suit into the European Union, there’s little Balkan sentiment to join the eurozone, nor is there an incredible amount of appetite from other more established EU members, like the United Kingdom, Denmark or Sweden, or newer central European countries.

It’s a different story in the Baltic states, though, and it’s not hard to see why — for small states that were swept into the Soviet Union for much of the 20th century, eurozone membership is as much about geopolitical strategy as about economics.  It explains why the only other European country on target to join the eurozone anytime soon is Lithuania, the third and final Baltic nation, which hopes to join the euro in January 2015.

But the specter of Russian domination doesn’t explain everything — after all, Poland is gently backing away from joining the euro, and its history with Russia is also complicated (though perhaps balanced by an equally complicated relationship with Germany).  Moreover, even Latvian nationalism in the face of valid concerns about Russian influence hasn’t kept the decision to join the eurozone from becoming incredibly unpopular, and polls show that a majority of Latvian voters oppose the decision to replace the Latvian lats with the euro by a nearly two-to-one margin. Continue reading Despite risks, Latvia (and all the Baltic states) still wants to join the eurozone →

European Union, Iceland

Iceland ends its short-lived quest to join the European Union

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gunnar

It should have come as no surprise to observers of Iceland, but its new center-right government has firmly closed the door to membership in the European Union anytime soon, with an announcement from Icelandic foreign minister Gunnar Bragi Sveinsson (pictured above, left) last week.Iceland Flag IconEuropean_Union

It was virtually certain that Iceland would take a step back from EU membership, given that both governing parties — the Framsóknarflokkurinn (Progressive Party) and the Sjálfstæðisflokkurinn (Independence Party) — campaigned against EU membership in Iceland’s April parliamentary elections.

Former social democratic prime minister Jóhanna Sigurðardóttir launched membership talks with the European Union in July 2009, when Iceland was still reeling from the effects of a financial crisis that bankrupted its three major banks and left Iceland in economic meltdown.  In the immediate aftermath of the September 2008 crisis, some Icelanders even seriously considered joining the euro after the Icelandic krónur tanked in value.  As Iceland’s economy has recovered to some degree, despite difficult loan burdens and continued currency controls, and as the eurozone has come to appear more like a monetary straitjacket than an economic life raft, Icelandic voters have increasingly soured on the benefits of EU membership.

Though prime minister Sigmundur Davíð Gunnlaugsson’s Progressive Party was seen as originally more open to continuing the talks, Gunnlaugsson seems to have taken aboard the more hardline views of the Independence Party — no one quite expected the government to end negotiations with such resolute finality in only its first month in office.

So while Iceland will continue to be a part of Europe, it will do so, like Norway and Switzerland, outside of a formal membership of the European Union.

As I wrote in the immediate aftermath of the election, however, the line between membership and Iceland’s current status is not as bright as you might expect: Continue reading Iceland ends its short-lived quest to join the European Union →

Bulgaria, Cyprus, European Union, France, Germany, Greece, Italy, Spain, United Kingdom

What Iceland’s election tells us about post-crisis European politics

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Iceland was supposed to be different.Iceland Flag IconEuropean_Union

In allowing its banks to fail, neo-Keynesian economists have argued, Iceland avoided the fate of Ireland, which nationalized its banks and now faces a future with a very large public debt.  By devaluing its currency, the krónur, Iceland avoided the fate of countries like Estonia and others in southern Europe trapped in the eurozone and a one-size-fits all monetary policy, allowing for a rapid return to economic growth and rapidly falling unemployment.  Neoclassical economists counter that Iceland’s currency controls mean that it’s still essentially shut out from foreign investment, and the accompanying inflation has eroded many of the gains of Iceland’s return to GDP growth and, besides, Iceland’s households are still struggling under mortgage and other debt instruments that are linked to inflation or denominated in foreign currencies.

But Iceland’s weekend parliamentary election shows that both schools of economic thought are right.

Elections are rarely won on the slogan, ‘it could have been worse.’ Just ask U.S. president Barack Obama, whose efforts to implement $800 billion in stimulus programs in his first term in office went barely mentioned in his 2012 reelection campaign.

Iceland, as it turns out, is hardly so different at all — and it’s now virtually a case study in an electoral pattern that’s become increasingly pronounced in Europe that began when the 2008 global financial crisis took hold, through the 2010 sovereign debt crisis in the eurozone and through the current European-wide recession that’s seen unemployment rise to the sharpest levels in decades.

Call it the European three-step.

In the first step, a center-right government, like the one led by Sjálfstæðisflokkurinn (Independence Party) in Iceland in 2008, took the blame for the initial crisis.

In the second step, a center-left government, like the one led by Jóhanna Sigurðardóttir and the Samfylkingin (Social Democratic Alliance) in Iceland, replaced it, only to find that it would be forced to implement harsh austerity measures, including budget cuts, tax increases and, in Iceland’s case, even more extreme measures, such as currency controls and inflation-inducing devaluations.  That leads to further voter disenchantment, now with the center-left.

The third step is the return of the initial center-right party (or parties) to power, as the Independence Party and their traditional allies, the Framsóknarflokkurinn (Progressive Party) will do following Iceland’s latest election, at the expense of the more newly discredited center-left.  In addition, with both the mainstream center-left and center-right now associated with economic pain, there’s increasing support for new parties, some of them merely protest vehicles and others sometimes more radical, on both the left and the right.  In Iceland, that means that two new parties, Björt framtíð (Bright Future) and the Píratar (Pirate Party of Iceland) will now hold one-seventh of the seats in Iceland’s Alþingi.

This is essentially what happened last year in Greece, too.  Greece Flag IconIn the first step, Kostas Karamanlis and the center-right New Democracy (Νέα Δημοκρατία) initially took the blame for the initial financial crisis.  In the second step, George Papandreou and the center-left PASOK (Panhellenic Socialist Movement – Πανελλήνιο Σοσιαλιστικό Κίνημα) overwhelming won the October 2009 elections, only to find itself forced to accept a bailout deal with the European Commission, the European Central Bank and the International Monetary Fund.  In the third step, after two grueling rounds of election, Antonis Samaras and New Democracy returned to power in June 2012.

By that time, however, PASOK was so compromised that it was essentially forced into a minor subsidiary role supporting Samaras’s center-right, pro-bailout government.  A more radical leftist force, SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς), led by the young, charismatic Alexis Tsipras, now vies for the lead routinely in polls, and on the far right, the noxious neo-nazi Golden Dawn (Χρυσή Αυγή) now attracts a small, but significant enough portion of the Greek electorate to put it in third place.

The process seems well under way in other countries, too.  In France, for examFrance Flag Iconple, center-right president Nicolas Sarkozy lost reelection in May 2012 amid great hopes for the incoming Parti socialiste (PS, Socialist Party) administration of François Hollande, but his popularity is sinking to ever lower levels as France trudges through its own austerity, and polls show Sarkozy would now lead Hollande if another presidential election were held today.

It’s not just right-left-right, though. The European three-step comes in a different flavor, too: left-right-left, and you can spot the trend in country after country across Europe — richer and poorer, western and eastern, northern and southern. Continue reading What Iceland’s election tells us about post-crisis European politics →

European Union, Iceland

Iceland’s election spells the end for its EU accession hopes

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(110) Tides pushes out at Vik

With capital controls still in place, a massively devalued krónur and galloping inflation, Iceland’s economy is not back to normal.European_Union Iceland Flag Icon

But it’s enough back to normal so that the window for Iceland’s accession to the European Union — or even, as was assumed during the worst days of its 2008 banking crisis, accession to the eurozone — is now very unlikely to happen.

Regardless of whether Sigmundur Davíð Gunnlaugsson and the Framsóknarflokkurinn (Progressive Party) or Bjarni Benediktsson and the Sjálfstæðisflokkurinn (Independence Party) come out on top in Saturday’s election, they are likely to form a center-right coalition that will look to reverse many of the initiatives of the social democratic / leftist government of Jóhanna Sigurðardóttir over the past four years.

Above all, none of the Sigurðardóttir government’s priorities is more endangered than the project of Iceland’s EU accession.  Most news stories note that both a Progressive-led or Independence-led government would slow accession talks, but it seems likelier that Iceland’s next government would essentially end the talks indefinitely — they might not formally withdraw Iceland’s EU application, but they certainly won’t take any action to further discussions.

While Gunnlaugsson has called for a referendum on the eventual result of talks, his party  virtually alone among Iceland’s parties argues that the country should not reimburse the British, Dutch and other governments who reimbursed non-Icelandic depositors who put their savings in Icesave prior to its collapse in 2008.  Benediktsson is hardly any more pro-Europe — he’s argued that Iceland should break off talks altogether and focus on deeper global ties, such as Iceland’s recent free trade agreement with the People’s Republic of China — the first such free trade pact between a Chinese and a European country, likely due to Chinese eagerness to enhance its role in the Arctic north.

If for some reason a Progressive/Independence government does complete the accession talks, the result would be put to a referendum of Icelandic voters who remain highly skeptical of Brussels’s pernicious influence.

Sigurðardóttir’s government formally applied for membership in July 2009 and negotiations began a year later, but with her party likely to return to opposition, the window for Iceland’s EU membership seems likely to end with her government, as Alda Sigmundsdóttir writes today in The Guardian:

So, what makes the Progressive party so popular?

They are vehemently opposed to joining the European Union…. Indeed, many of the Progressives’ policies and declarations lean precipitously towards a new nationalism, with mildly xenophobic stances on issues such as immigration and asylum seekers, and party symbols that are vaguely reminiscent of fascism. The Progressive party was also the party that was most fiercely opposed to Iceland repaying the UK and Holland for the failure of the Icesave online bank.

If [Gunnlaugsson] wins, it will be because Icelanders fear abuse and exploitation by outside forces more than they do a return to the corrupt days of old.

Those are some fairly strong accusations, but I have to wonder if Icelandic voters aren’t simply being rational with respect to EU accession — they already have the benefits of free movement of goods and free borders with Europe, as well as much of the legal harmonization that typically comes with membership and a robust economic relationship with Europe that developed without Icelandic membership.  Why formalize the deal when they already have so many of the benefits of membership without any potential for considerable drawbacks that could harm Iceland’s cherished (and highly protected) fishing industry or the fierce national pride of a uniquely compelling nation that won its own independence from Denmark in 1944? Continue reading Iceland’s election spells the end for its EU accession hopes →

Iceland

Center-right parties poised to return to power in Iceland

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Kim Jong-un, at age 30, is the world’s youngest leader, and there are only a handful of thirtysomething world leaders.Iceland Flag Icon

But if polls are correct, Sigmundur Davíð Gunnlaugsson (pictured above) may lead Iceland’s Framsóknarflokkurinn (Progressive Party) to victory in April 27’s parliamentary elections, giving the Progressives their best victory since 1931 and, perhaps, in its history.  That would make Gunnlaugsson, at age 37, the country’s youngest prime minister since its 1944 independence.

Icelandic voters go to the polls Saturday after a fairly tumultuous time over the past five years following the 2008 collapse of its banking sector, a massive depreciation and the introduction of capital controls on Iceland’s currency, the krónur, despite a return to tepid GDP growth after a 6.5% contraction in 2009 and an unemployment rate that’s now below 5%.

I’ll sideswipe the long debate among American economists over whether Iceland’s economic policy was smarter than that in Ireland or the Baltic states.  If you want an in-depth take from an Icelandic observer, read this instead.  I’ll add that Iceland’s ability to set its own monetary policy certainly helped it bounce back in terms of GDP growth, but it also glided the path for a massive krónur depreciation and inflation that’s eroded those gains that Iceland has made in the past five years.  Much of Iceland’s household debt, before 2008, was denominated in non-krónur currencies, and debt today is otherwise linked to currency or inflation indices.  That has made debt repayment, especially for home mortgages, a grueling nightmare in post-boom Iceland.

So the economic situation is Iceland is complicated, and though there’s a lot of evidence to suggest that Iceland’s economy might even be worse if it were part of the eurozone, that doesn’t mean that the everyday Icelandic voter feels like things are quite back to normal.

But politics, however, do seem set to return to the pre-boom ‘normal,’ given that the Progressives were a longtime ally of the dominant party in Iceland’s history since independence, the Sjálfstæðisflokkurinn (Independence Party), which was formed precisely — as you may have guessed — to enact Icelandic independence from Denmark.

The two parties are now fighting for first place in the April 27 parliamentary elections, and it’s virtually certain that they’ll form the coalition that constitutes Iceland’s next government.  No party in Iceland’s post-independence history has even won an absolute majority in the 63-member Alþingi, Iceland’s parliament.

Polls have shown the Progressive Party with a growing lead throughout 2013, stemming largely from their insistence that Iceland should not reimburse the U.K. and other governments for the Icesave debacle — non-Icelandic savers who had deposited their money in Icesave were wiped out in late 2008, and though their own government have largely made them whole, they have turned to Iceland for repayment with interest.  Although most Icelandic parties agree that Iceland should make the payment, the matter’s been tangled up in both domestic and international litigation, and the repayments are very, very unpopular among the Icelandic electorate.

But the Independence Party seems to be catching up once again, and the two parties are now essentially tied for the lead, meaning that either party could win the greatest number of seats in the Alþingi.  If the Independence Party does edge out the Progressives, Iceland’s new prime minister could be the Independence Party leader, Bjarni Benediktsson (pictured below), who only narrowly survived a leadership challenge a couple of weeks ago, when the party’s polling numbers were more depressed.

bjarni Continue reading Center-right parties poised to return to power in Iceland →

Poland

WIth referendum call, Tusk gently backs away from eurozone

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The economic blogosphere is lighting up over reports that Polish prime minister Donald Tusk is now talking about a referendum for his country to join the eurozone.Poland_Flag_Icon

That’s a big deal on the surface — with 40 million people, Poland is the largest European Union member after the United Kingdom not to use the single currency, and it’s one of eastern Europe’s fastest-growing economies.

Paul Krugman at The New York Times and Dylan Matthews at The Washington Post‘s Wonkblog are on the case, with very solid arguments for why Poland is crazy to want to join the eurozone.  Writes Matthews:

It’s fair enough if Poland wants to develop closer ties to its European neighbors. But as [Krugman notes], joining the euro would deprive Poland of the strategy that allowed it to weather the recession so effectively. The key to the Polish miracle was massive currency devaluation.

Krugman and Matthews both highlight that the Polish key to outperforming the rest of Europe has been its ability to devalue the złoty and control its own monetary policy.  It’s also helped that Poland has one of Europe’s lowest public debt loads — around 55% of GDP, compared to Germany’s 80% public debt load or 90% in France.

If you need to look any further for counterfactual proof, take a look at former East Germany, where economic growth still lacks former West Germany — despite the overwhelmingly strong political rationale for Germany reunification, it’s not clear that a currency union with West Germany made economic sense for East Germany, let alone a currency union with France, Belgium and the Netherlands. The Czech Republic, Slovakia and Poland have all grown at more rapid rates in the past two decades.

Krugman writes, ‘It really does make you want to bang your head against a wall.’

But they should probably calm down, because Poland is as unlikely as ever to join the eurozone — Tusk isn’t taking a gamble so much as he’s taking a bath on the Polish currency issue by pushing its resolution to sometime ‘at the end of the decade‘ — and far after the next Polish election.

Over two-thirds of Polish voters oppose eurozone membership, and those numbers seem unlikely to change anytime soon, given the chaos we’ve seen in peripheral eurozone countries from Cyprus to Portugal.

Tusk (pictured above with European Council president Herman van Rompuy), who has long been in favor of eurozone membership for Poland, is looking for a way out, not a way in. Facing reelection in 2015 for his liberal center-right Platforma Obywatelska (PO, Civic Platform), Tusk certainly doesn’t want to go to voters with the albatross of eurozone support around his neck. Continue reading WIth referendum call, Tusk gently backs away from eurozone →

Cyprus, European Union

What comes next for Cyprus and the EU following Friday’s haircut ‘bail-in’?

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cyprus

nicenic

So much for ‘nice Nic’ — it’s not that he’s reverted back to ‘nasty Nic’ so much as ‘nonessential Nic.’European_Unioncyprus_world_flag

Fifteen days after his inauguration as Cyprus’s new president, Nicos Anastasiades (pictured above, bottom), was forced into what’s now become a growing domestic, eurozone and international crisis when European Union and International Monetary Fund leaders presented Anastasiades with a €10 billion bailout package.

The catch, of which you’re almost certainly aware at this point, is that an additional €5.8 billion of savings will come in the form of a one-time levy on all bank accounts in Cyprus — deposits of  €100,000 will pay a 9.9% levy and deposits of under €100,000 will pay a 6.75% levy, even those deposits are insured by a system similar to the FDIC guarantee in the United States.  Senior bondholders won’t take a haircut.

So if you’re a hedge fund, for now at least, you’ll receive fully 100% of the face value of any debt you hold in Cypriot banks.  If you’re, say, a widowed Cypriot pensioner with €30,000 saved in a Cypriot bank, you’ll wake up Tuesday morning to find that you now have just €27,975.

It’s impossible to overstate just how politically explosive the plan was — in one fell swoop, Europe’s leaders have single-handedly done all of the following:

  • undermined the Cypriot presidential administration just days after it was elected with the support of those same European leaders and a promise by Anastasiades that any bailout would not include deposit haircuts;
  • provided ammunition to every euroskeptic in Europe from Beppe Grillo in Italy to Nigel Farage in the United Kingdom by reinforcing the notion that European institutions suffer from a lack of democratic legitimacy and gratuitously trample national sovereignty;
  • pulled the rug out from under the financial industry in Cyprus, essentially the only growing sector in the Cypriot economy;
  • handed to Cyprus’s parliament — where Anastasiades’s center-right Democratic Rally (DISY, Δημοκρατικός Συναγερμός or Dimokratikós Sinayermós), controls just 20 out of 56 seats — a strong reason to vote against the deal, thereby exacerbating the uncertainty throughout the week;
  • undermined the concept of deposit insurance throughout the entire eurozone;
  • by Europeanizing — or even internationalizing — what should have been a small matter in a country with a GDP ten times smaller than Greece’s, potentially initiated bank runs in Italy, Spain, and who knows where else throughout Europe;
  • needlessly antagonized Russia in the process, and may have provoked Russia into making a politically explosive counter-offer to Cyprus; and
  • probably did nothing to help Cyprus’s long-term economic outlook, because if the levy weren’t enough to depress Cypriot growth and undermine its banking industry, further austerity designed to reduce Cyprus’s public debt is certain to send Cyprus’s GDP swooning for some time to come.

That’s right — the first major decision of the Eurogroup of eurozone finance ministers since choosing as its president Jeroen Dijsselbloem, a center-left finance minister newly elected in the Netherlands just last autumn, is to demand an increase in the Cypriot corporate tax rate from 10% to 12.5% and a further increase on Cyprus’s savings tax.

That’s in addition to the deposit haircut that everyone’s mostly focused upon.

Anastasiades seems to have had very little option but to accept the deal, despite the fact that European leaders, including German chancellor Angela Merkel, actively supported his presidential bid in last month’s election:

[Anastasiades] spoke on Saturday of a ready-made decision imposed on Nicosia in the form of a blackmail: Take it or have the eurozone crumble….

In a written statement he issued on Saturday afternoon, Anastasiades said “Cyprus came across a previously made decision, a fait accompli.” In his defense he said that the emergency situation “did not arise in the last 15 days that we have undertaken the country’s administration.”

In the February 24 presidential runoff, Anastasiades won a landslide victory, with 57.48% of the vote to just 42.52% for health minister Stavros Malas, the candidate of the socialist Progressive Party of Working People (AKEL, Aνορθωτικό Κόμμα Εργαζόμενου Λαού or Anorthotikó Kómma Ergazómenou Laoú).  

Anastasiades, in an address to the nation Sunday night, meekly argued that depositors would nonetheless receive bank shares in return for the one-time assessment and remained optimistic that recently discovered natural gas deposits in Cyprus might well boost Cyprus’s banks in the near future.

ATM Cyprus

The political fallout for Cyprus 

To the extent domestic politics is to blame for the current Cypriot crisis, AKEL is far from blameless — it’s unclear whether Cypriots will fault Anastasiades less than half a month into his administration more than his predecessor, Demetris Christofias, the country’s president from 2008 until last month.

Christofias and European leaders opened talks in June 2012 to secure a bailout, and Christofias even began to implement some small reforms, including a 5% VAT on food and drugs and an increase in the bank levy and tobacco taxes, but fell far short of European demands to reform public employment, the public pension system, and privatization of state-run industries in a country where unemployment has now risen to 14.7%.

In addition, the bailout talks were particular complex for other factors, including the outsized amount of the Cypriot banking sector’s debt, tied in large part to the Greek debt crisis.  In addition, many Russian oligarchs have deposited money in Cyprus’s banks, and Cyprus has been scolded in the past for the facilitation of money laundering from less-than-pristine Russian sources.

With Merkel up for reelection in September, it would have hardly been palatable for her to push through a German-funded bailout of dodgy Russian depositors, which was apparent enough in the latest round:

Merkel’s Finance Minister Wolfgang Schäuble had gone to Brussels with a firm mandate from Berlin: “no bail-in, no bailout”, said a member of her government. That meant: unless depositors took a hit, there would be no agreement and Germany would not contribute towards a package for Cyprus.

So talks never quite progressed, and with Cyprus facing imminent sovereign default, Anastasiades came rather easily to office with a plan to renew those talks, though he repeatedly refused to accept a deposit haircut of the kind now being implemented.

Although today was a bank holiday in Cyprus, banks were initially set to close on Tuesday, but will now be closed until Thursday as well, as the Cypriot parliament has repeatedly delayed taking up debate on the Cypriot package.

Anastasiades’s DISY, as noted above, controls just 20 out of 56 elected seats in the Cypriot House of Representatives (Βουλή των Αντιπροσώπων) and AKEL controls 19.  The centrist Democratic Party (DIKO, Δημοκρατικό Κόμμα or Dimokratikó Kómma), which backed Anastasiades in the presidential race, controls another nine seats.  Three additional parties that largely supported the center-left, independent Giorgos Lillikas in the presidential election control an addition eight seats, including five by the Movement for Social Democracy (EDEK, Κίνημα Σοσιαλδημοκρατών or Kinima Sosialdimokraton).

That means that if AKEL, EDEK and other small parties oppose the deal, DISY and DIKO hold just of 29 votes, just enough to pass the Cypriot package without any defections.

Moreover, DIKO’s leader has already called for changes to the bailout legislation, and it looks increasingly like Anastasiades lacks the support to win a vote in parliament, which means that European leaders will have to renegotiate the previous deal.  It’s not clear how much time Cyprus has before its banks (or its government) become insolvent.

Cold War redux?

Meanwhile, Russian president Vladimir Putin denounced the decision as ‘unfair, unprofessional and dangerous.’

Russia hasn’t indicated whether it will extend or otherwise change the terms of an existing €2.5 billion loan to Cyprus — if Russia refuses to extend the loan for another five years, the Cypriot bailout will need to be even larger.  So there’s that.

I wouldn’t be surprised if Anastasiades and members of the Russian government are discussing an alternative to the current European-IMF plan — the Republic of Cyprus, which occupies the southern half of the island of Cyprus, is not a member of the North Atlantic Treaty Organization, and a €17 billion bailout would be a small price for Russia to pay in exchange for closer military ties or a Russian naval base on the island.

Perhaps even more tantalizing for Russia, and its state-owned natural gas company Gazprom, are newly discovered natural gas deposits that Cyprus hopes will fuel future economic growth.  Indeed, there are already vague reports of a Russian counteroffer — the official Russian news agency seems to indicate that emergency talks have now been initiated:

Russia’s Gazprom has not offered the Republic of Cyprus financial assistance in restructuring the country’s banks in exchange for the right to gas production in the exclusive economic zone of Cyprus. Gazprombank initiated this offer, a spokesman for the gas giant told Tass.

That result would cause dismay among the United States and its European and NATO allies which, by the way, includes Turkey.  Turkey has occupied the northern half of the island of Cyprus since the 1970s — the Turkish Republic of Northern Cyprus declared its independence from the Greek Cypriot republic to the south in 1983, and the two have remained divided ever since.  So what’s an economic crisis and a domestic political crisis could also become a geopolitical security crisis soon enough.

The economic and political fallout for the eurozone

Reaction from economic commentators has been essentially universally negative since news broke early last weekend. Continue reading What comes next for Cyprus and the EU following Friday’s haircut ‘bail-in’? →

Czech Republic, European Union

Václav Klaus, fresh from Czech presidency, discusses eurozone in Washington

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Just three days after leaving the Czech presidency, Václav Klaus spoke at the Cato Institute in Washington earlier today — Klaus is joining Cato as a senior distinguished fellow this spring.czechEuropean_Union

Klaus, who stepped down after a decade in office, didn’t break much new ground — his remarks were essentially everything you’d expect from the famously euroskpetic former president, who was the last European Union head of state to sign the Treaty of Lisbon (and quite reluctantly, at that).

The great eurozone fight

In brief, Klaus has long argued that the eurozone is not an optimal currency zone, it’s a project that was implemented without sufficient democratic input from everyday Europeans, and the economic costs of monetary integration and centralization far outweigh the benefits, and those costs have become increasingly evident from the economic pain suffered today in Greece, Spain, Italy and throughout Europe.

Klaus’s diagnosis has become fairly uncontroversial — both on the left and the right, and for both intergovernmentalists and neo-functionalists alike.  A lot of European federalists would agree that the European Union needs more robust democratic institutions at the supranational level.  Many economists agree that the one-size-fits-all monetary policy has been incredibly harmful to many countries in southern Europe since 2008, and the painful internal devaluation forced upon many countries in the European periphery, from Latvia to Greece, has been a needless exercise in poor economic policymaking.

But whereas many economists would argue that the solution lies in greater fiscal harmony (especially through fiscal transfers from wealthier regions to poorer regions), looser monetary policy, a eurozone-wide borrowing capacity, debt forgiveness and a doubling-down on the more long-standing commitment to the free movement of goods, services and people throughout the European Union, Klaus’s solution is to unwind the eurozone.

Klaus would rather see a way for Greece — and other troubled economies — to simply exit from a eurozone that’s delivered now nearly half a decade of GDP contraction, painful downward pressure on income, and widespread unemployment and social rupture.

That’s not a crazy idea economically — if Greece could leave the eurozone tomorrow (or if Greece simply went bankrupt, thereby essentially forcing Greece out of the eurozone), it could conceivably pursue a much more aggressive monetary policy, devalue its currency, and take other steps to make its exports more competitive in global markets once it’s no longer yoked to a monetary policy that’s better suited for, say, the German economy.

But that’s not the entire story.  Greece might also suffer extraordinarily in the short-run while it makes that transition — starting with how it would reintroduce the drachma and how it would even finance basic governance outside the current eurozone regime, forcing perhaps even more austere budget-cutting in a country where the social safety net is already tattered.

And those are just the problems inside Greece — though the Greek economy is just a fraction of the European economy, it could set off a chain reaction of fear, bank runs and deep recession throughout the eurozone as investors pull out of not only the peripheral economies, but also out of the entire eurozone.  How would a massive Greek devaluation affect Cyprus? Would Spain and Italy withstand the inevitable bank runs and currency flight? The chain reaction of unraveling one of the world’s foremost reserve currencies could well be catastrophic.

Looking to national parallels: the Czechoslovak breakup and German reunification

Klaus related the current monetary union to the breakup 20 years ago of Czechoslovakia into two separate nations — a process that Klaus said was painful though necessary (though the Slovak economy is doing much better these days than the Czech economy).  But Greeks might be troubled by the more painful example of the breakup of the Yugoslav federation and the Soviet Union, both of which were also monetary unions as well as political unions.  The breakup of the ‘ruble zone’ led to massive hyperinflation throughout the Soviet Union and an economic shock that cut standard of living in half.  There’s simply no way to know what forces could be unleashed by the process — no matter what anyone says, there’s not a precedent for unraveling even a tiny part of the world’s largest currency union in an orderly fashion.

I would have liked to hear, in particular, Klaus’s thoughts on another contemporary experiment in currency union: German reunification.

Continue reading Václav Klaus, fresh from Czech presidency, discusses eurozone in Washington →

Malta

Who is Joseph Muscat?

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It’s the least populous — and newest — member of the eurozone, but tiny Malta, with around 420,000 people, is poised to become the latest European nation to vote for massive change, tossing out the long-governing center-right Nationalist Party (Partit Nazzjonalista) of prime minister Lawrence Gonzi. malta

Polls have closed in Malta, and opinion polls show that Joseph Muscat, the leader of the opposition center-left Labour Party (Partit Laburista), will likely now become Malta’s new prime minister and, at age 39, the eurozone’s youngest leader (younger even than Finnish prime minister Jyrki Katainen).

What does that mean for Malta and for Europe?

Muscat has borrowed liberally from the ‘change’ playbook that propelled U.S. president Barack Obama to office in 2008, but it’s not incredibly clear exactly the kind of change that he’ll bring to Malta, other than a promise to reduce Malta’s incredibly high electricity rates by 25% (though, again, it’s not clear how he’ll do that).

But Malta, with GDP growth of around 1.5% in 2012, unemployment of just 7% and a budget deficit under the EU threshold of 3% of GDP, has been relatively immune to the recession that’s gripped much of the eurozone and especially Mediterranean Europe, thanks in large part to tourism and a growing financial sector.

Muscat, a former member of the European Parliament, took over the leadership of the party following the previous March 2008 elections, in which Labour very narrowly lost the election, giving the Nationalists a one-seat advantage in the 69-member parliament.

He succeeded Alfred Sant, who led Labour throughout the 1990s and led the (failed) opposition to the 2003 referendum that opened the way for Maltese accession to the European Union.  Muscat and most of the Labour Party in 2003 opposed accession, which along with accession to the eurozone, is the chief Nationalist accomplishment of the past decade.

Muscat has since backtracked and supports Malta’s eurozone membership — that’s good, because Malta will hold the rotating six-month EU presidency in 2017.

Gonzi, prime minister since 2004, leads a party that has governed Malta, with the exception of a 23-month Labour government in the late 1990s, since 1987.  His government fell earlier this year over the budget — not because of any austerity measures, but because a member of his own party opposed a decision to hire a German operator to manage Malta’s national bus service.

Muscat’s campaign, however — long on platitudes and short on details — suggest that the Maltese rationale for change is different than that of most European voters, who over the past two years have ousted incumbents from France to Greece to Spain to Ireland, but simply because they have grown weary of a Nationalist government that’s come to the exhausted end of a long run in power:

Has Muscat landed at a fortuitous time in Maltese politics? The Nationalists are a spent force ten years after EU accession, the unpredictable Alfred Sant has been exorcised from the new Labour tableau, and the perception of the ‘clique’ at the PN’s Stamperija and Castille has been amplified so much, that the fin-de-siècle odour is too strong to ignore. Enter the politics of the air-freshener.

The dynamic is reminiscent of the fatigue many voters felt toward the end of the Conservative Party’s 18-year hold on power in the United Kingdom in 1997 (just cast Gonzi as former UK prime minister John Major).

Likewise, Muscat has led a flashy campaign to reinvigorate the once-dowdy Labour Party in the same way that Tony Blair revamped the UK Labour Party.  Since taking over from Sant in 2008 (cast Sant as Malta’s answer to Neil Kinnock), Muscat has worked to build bridges with the Maltese business committee and otherwise modernized and moderated his party’s views, least of all in support of Malta’s new role in the EU.

Nowhere in the campaign has there been the kind of discontent or anger or economic pain that’s fueled the rise of protest movements — like the Movimento 5 Stelle (Five Star Movement) that recently won over 25% of the vote in the Italian elections.

As such, Muscat’s election seems unlikely to add much to the ongoing ‘austerity vs. growth’ debate in Europe.

European Union, The Netherlands

Who is Jeroen Dijsselbloem?

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Most indications are that the next Euro Group head will be a relative newcomer to the group of eurozone finance ministers — Dutch minister Jeroen Dijsselbloem, who declared his formal candidacy for the job today.European_UnionNetherlands Flag Icon

As I noted at the beginning of the year in my piece on 13 up-and-coming politicians to watch in 2013, the current head of the Euro Group since 2005, Jean-Claude Juncker, also prime minister of tiny Luxembourg since 1995 and the Luxembourgian finance minister from 1989 to 2009, is stepping down from the role.

Dijsselbloem belongs to the anti-austerity social democratic Partij van de Arbeid (PvdA, Labour Party) — that has joined a coalition that’s headed by the decidedly more budget-obsessed Volkspartij voor Vrijheid en Democratie (VVD, the People’s Party for Freedom and Democracy) and prime minister Mark Rutte.

The second Rutte cabinet took office as a ‘purple’ Lib-Lab coalition in November 2012 after a closely fought election in September 2012, during which Labour leader Diederik Samsom fought for a more gradual process of budget cuts to bring the Dutch budget within 3% of GDP.

The Euro Group came into being in the late 1990s in advance of the introduction of the single currency as an informal group.  In 2005, Juncker became the group’s first president amid a push to formalize the group’s role in 2009 though a protocol to the Treaty of Lisbon:

The Ministers of the Member States whose currency is the euro shall meet informally. Such meetings shall take place, when necessary, to discuss questions related to the specific responsibilities they share with regard to the single currency. The Commission shall take part in the meetings. The European Central Bank shall be invited to take part in such meetings, which shall be prepared by the representatives of the Ministers with responsibility for finance of the Member States whose currency is the euro and of the Commission.

The Euro Group typically meets a day before the Economic and Financial Affairs Council of the Council (Ecofin) of the European Union — Ecofin is comprised of the wider group of all 26 EU member state finance/economics ministers.  Accordingly, the Euro Group typically dominates economic policymaking at the Council level.  At the Council, policies related to fiscal matters must be adopted unanimously, though other policies can be adopted by the EU’s qualified majority voting mechanism (i.e., essentially a supermajority formula that requires both a majority of the 27 member states and a majority of the EU population).

The Euro Group president is appointed for a term of 2.5 years, by majority vote of the Euro Group, and the next president could be appointed as early as Monday, though French finance minister Pierre Moscovici has called for a more formal and transparent process of selecting the next president.  Moscovici has also called on Dijsselbloem to outline his views on the future direction of the Euro Group, and Dijsselbloem is set to discuss goals at Monday’s meeting, though Juncker has been dropping all sorts of hints that Dijsselbloem’s selection is all but assured.

Dijsselbloem has been a member of the Tweede Kamer (the lower house of the Dutch parliament) since 2000, after spending four years as an assistant at the ministry of agriculture, nature management and fisheries.

In parliament, Dijsselbloem has been a moderating voice on highly charged issues like the role of Muslims in Dutch society.  In 2007, he spearheaded a commission on educational reform.  Earlier in 2012, when former Amsterdam mayor Job Cohen resigned as Labour leader, Dijsselbloem was chosen to serve as the party’s interim leader until Samsom was elected as the permanent Labour leader, and he was the fifth candidate on Labour’s list in the 2012 elections.

As early as the 2003 election, Dijsselbloem was seen as a Samsom confidante — they campaigned together in that year as the ‘rode ingenieurs‘ — the ‘Red Engineers’ — due to their red overalls and scientific backgrounds, Samsom in nuclear energy and Dijsselbloem in agricultural economics.

Despite just two months on the job as a pro-growth minister in a government that will seek to reduce the Dutch budget to within 3% of GDP in 2013, Dijsselbloem literally personifies the current fiscal debate in Europe.  It helps that the Netherlands was one of the original six countries that formed the predecessor to the European Union and that it retains one of Europe’s last remaining ‘AAA’ credit ratings.

On one side, as personified by Moscovici and French president François Hollande of the center-left Parti socialiste, only aggressive government policies to boost aggregate demand can reduce unemployment and jumpstart Europe’s economic engine.  Although even Hollande admits the need to bring France’s budget in line with the European Union standard, generally, of within 3% of GDP, Hollande’s government has preferred to implement tax increases rather than cut spending too deeply.

On the other side, as personified by German finance minister Wolfgang Schäuble and German chancellor Angela Merkel of the center-right Christlich Demokratische Union Deutschlands (CDU, Christian Democratic Union), the key to prosperity — even in the face of recession — is to cut spending and narrow the budget deficit, thereby bringing more investment and business confidence by shoring up public finances. Continue reading Who is Jeroen Dijsselbloem? →

Greece

Greek government, troika reach agreement on Greek bailout

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It seems all but done — Greece’s government and the ‘troika’ of the International Monetary Fund, the European Central Bank and the European Commission have reached an agreement on the latest disbursement of funds that Greece needs to finance government operations, in exchange for a series of budget cuts and labor market reforms. 

In an additional twist, there are quasi-official reports from both Germany and Greece that the bailout program will be extended from the end of 2014 to the end of 2016, which will give Greece until at least 2016 to whittle down its budget deficit to the 3% required under EU rules, though it seems unlikely that Greece’s budget will be anywhere near to closing in on that target by even 2016.

The details are essentially as described over the past four months — €13.5 billion in budget cuts over the next two years, €9 billion of which will take effect in 2013.  The bottom line for Greek finances is that a Greek exit from the eurozone, which seemed virtually inevitable through much of 2012, has now been delayed, and delayed for a significant amount of time (Citi, for example, lowered its odds of a ‘Grexit’ to 60%, and predict it could still happen, but only in the first half of 2014).

That’s a significant victory for Greece’s prime minister, in office for barely four months, Antonis Samaris (pictured above, right, with Euro Group president and Luxembourg prime minister Jean–Claude Juncker), and it will now give him some breathing space to turn to Greece’s economic depression.

For me, there are three notable political aspects to the deal worth noting:  Continue reading Greek government, troika reach agreement on Greek bailout →

European Union

Some thoughts on the Nobel Peace Prize

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The Nobel Peace Prize this morning was awarded to the European Union ‘for over six decades contributed to the advancement of peace and reconciliation, democracy and human rights in Europe’:

Thorbjorn Jagland, the chairman of the panel awarding the prize, said it was a signal focusing on the union’s historical role binding France and Germany together after World War II and its perceived impact in spreading reconciliation and democracy beyond the Iron Curtain that once divided Europe and on to the Balkans. “The stabilizing part played by the E. U. has helped to transform most of Europe from a continent of war to a continent of peace,” he said.

I’ve got a busy morning, but I wanted to share three initial observations:

First, this is obviously a not-so-subtle attempt by the Nobel Committee to provide some encouragement at a time when the EU is in a bit of a crisis — not just in the sense of lurching to save the eurozone, but a more existential political crisis.  In many ways, the EU is right now a sort of halfway house that resembles something like the pre-constitutional United States, when it was governed by the ineffective Articles of Confederation.

The EU today has a monetary union, but no fiscal or political union to match, despite the failure of the much-derided “EU constitution” effort in 2004 and 2005 that ended with a resounding failure in referenda in France and the Netherlands.  With German chancellor Angela Merkel this week on a trip in Greece to discuss that country’s finances after four years of recession and biting austerity designed to keep Greece in the eurozone, the Nobel Prize will be a reminder that the stakes of the eurozone’s success really are more than just determining the  outcome of an experiment in monetary policy, but the future of the entire ‘European project’ — and I think that’s a point upon which both the pro-federalist ‘neo-functionalism’ and the more skeptical ‘intergovernmentalism’ schools of EU integration would agree.

Secondly, it feels like a posthumous Nobel award to Jean Monnet (pictured above) and Robert Schuman, a former prime minister and foreign minister of France.  The two were as responsible as anyone for the establishment of the EU’s predecessor, the European Coal and Steel Community in 1951 among France, Germany, Italy, the Netherlands, Belgium and Luxembourg.  Monnet’s plan for coal and steel cooperation and the 1950 Schuman Declaration largely became the blueprints for the creation of the ECSC.

If it seems shocking that the EU has been awarded the Nobel Peace Prize, it’s only because it has been so successful.  From cooperation over coal in the Saar, the European project expanded into a means for creating a common market to tear down tariffs among European nations, a vehicle for unity against the Soviet Union, a mechanism for boosting fledgling democracy in Greece, Portugal and Spain in the 1980s, a salve to soothe Europeans worried about the reunification of Germany in the early 1990s, and the easiest way for “western Europe” to reach out to the newly liberated eastern European states following the collapse of the Soviet Union.  Today, the EU remains a stabilizing force in the Balkans — with Serbia, the last bastion of ethnic-based warfare on the European continent in the 1990s, now a fledgling democracy that itself is in EU accession talks.

Finally, if you think of the Prize as both a boost to EU at a time of institutional stress and an acknowledgement of Monnet’s efforts, I also see it as an acknowledgement of the leadership of Jacques Delors — the eighth president of the European Commission, he more or less railroaded the Maastricht treaty through what was then the European Economic Community in 1992 (despite some fireworks with UK prime minister Margaret Thatcher).  Although I think it’s still too early to tell whether the euro as a single currency is a success or a failure, if the EU pulls through this crisis by developing a fiscal union and a political union commensurate with its monetary union, Delors will rightly be seen as just as important as Monnet and Schuman for his role in bringing about a real supranational union of European states.