E SSAY COLLECT ION

Crisis in the Eurozone

Transatlantic Perspectives
ESSAY COLLECTION

Crisis in the Eurozone

Transatlantic Perspectives

This publication is a part of CFR’s International Institutions and Global

Governance (IIGG) program and has been made possible by the generous
support of the Robina Foundation.
The Council on Foreign Relations (CFR) is an independent, nonpartisan membership organization,
think tank, and publisher dedicated to being a resource for its members, government officials, busi-
ness executives, journalists, educators and students, civic and religious leaders, and other interested
citizens in order to help them better understand the world and the foreign policy choices facing the
United States and other countries. Founded in 1921, CFR carries out its mission by maintaining a
diverse membership, with special programs to promote interest and develop expertise in the next
generation of foreign policy leaders; convening meetings at its headquarters in New York and in
Washington, DC, and other cities where senior government officials, members of Congress, global
leaders, and prominent thinkers come together with CFR members to discuss and debate major in-
ternational issues; supporting a Studies Program that fosters independent research, enabling CFR
scholars to produce articles, reports, and books and hold roundtables that analyze foreign policy is-
sues and make concrete policy recommendations; publishing Foreign Affairs, the preeminent journal
on international affairs and U.S. foreign policy; sponsoring Independent Task Forces that produce
reports with both findings and policy prescriptions on the most important foreign policy topics; and
providing up-to-date information and analysis about world events and American foreign policy on its
website, CFR.org.

The Council on Foreign Relations takes no institutional positions on policy issues and has no affilia-
tion with the U.S. government. All statements of fact and expressions of opinion contained in its pub-
lications are the sole responsibility of the author or authors.

For further information about CFR or this paper, please write to the Council on Foreign Relations,
58 East 68th Street, New York, NY 10065, or call the Director of Communications at 212.434.9400.
Visit CFR’s website, www.cfr.org.

Copyright © 2010 by the Council on Foreign Relations®, Inc.

All rights reserved.
Printed in the United States of America.

This paper may not be reproduced in whole or in part, in any form beyond the reproduction permit-
ted by Sections 107 and 108 of the U.S. Copyright Law Act (17 U.S.C. Sections 107 and 108) and
excerpts by reviewers for the public press, without express written permission from the Council on
Foreign Relations. For information, write to the Publications Office, Council on Foreign Relations,
58 East 68th Street, New York, NY 10065.
Table of Contents

INTRODUCTION

Crisis in the Eurozone: An Overview 1

Stewart M. Patrick

ESSAYS

Eurozone Crisis as Historical Legacy: The Enduring Impact of

German Unification, Twenty Years On 4
Mary Elise Sarotte

A New Reality for the European Union 8

Katinka Barysch

The Potential Twilight of the European Union 13

Charles A. Kupchan

The European Union as a Model for Regional Integration 17

Fraser Cameron

The Eurocrisis and the Uncertain Future of European Integration 22

Kathleen R. McNamara

ABOUT THE AUTHORS 25

MISSION STATEMENT OF THE 26

IIGG PROGRAM
 1

Crisis in the Eurozone: An Overview

Stewart M. Patrick

The extraordinary crisis in the eurozone poses an unprecedented challenge to the integrity of the
European Union (EU). The International Institutions and Global Governance (IIGG) program
asked experts on both sides of the Atlantic to assess the immediate and long-term implications for
the continent’s political and economic future. We were particularly interested in its likely impact
on the future of the “European project,” on the shape of the European economy, on the attractive-
ness of the EU model of European integration, and on the EU’s future as a global player.

 The Future of the “European project”: Historically, crises have often provided a catalyst for conti-
nental integration. Perceived European decline in the 1980s, for instance, ultimately spurred the
Single European Act and the creation of the EU itself. Could similar dynamics unfold today?
How would the crisis affect the EU’s internal political evolution and, by extension, future insti-
tutional development?
 The European economy: The crisis revealed problems with the EU’s fiscal and monetary policy—
problems too fundamental to be solved simply with a bailout. Would the Maastricht criteria for
European economies continue to be sufficient and, if not, does the political will exist to reform
the eurozone in necessary ways—such as a move toward a common fiscal policy? Absent such
reforms, can the euro survive?
 Europe as a model for regional integration: Prior to the euro crisis, many international observers
viewed the EU as the gold standard for regional integration. Has this view changed since the cri-
sis and what lessons have other regional groupings gleaned from the EU’s recent turmoil?
 Europe’s future as a global actor: Finally, how would the crisis affect the EU’s global role, includ-
ing the willingness of EU member states to devote diplomatic attention and material resources
to promoting international stability? Would the crisis lead Europeans to turn further inward?

EMERGING THEMES

As the authors explored these questions, several fascinating themes emerged.

 The EU suffers from a leadership void. There is general consensus that the EU requires visionary
leaders to move past the eurozone crisis and the broader systemic problems that have built up
over the past two decades. However, none of the major European leaders have stepped up to the
plate; instead, they are focused on appeasing domestic constituencies.
 National interests are diverging from EU interests. Since the end of World War II, European nations
have moved toward greater integration based on the belief that national interests are best served
by alignment with the European community. The euro crisis caused many to rethink this equa-
tion. Increasingly, European publics (especially in the larger and more powerful member states)
view the EU as more detrimental than beneficial to their national interests.
 2

 Political and economic institutions may be insufficient. Even as the European appetite for integra-
tion diminishes, the best solution to the present crisis may indeed be greater integration. Mone-
tary union developed without the requisite support from political and economic institutions,
depriving the EU of mechanisms to enact much-needed policy and reforms. Now that the euro-
zone is in crisis, strengthening EU coordination and institutional capacity appears to be the best
solution.
 Germany’s support for integration can no longer be taken for granted. Germany provides a perfect
example of these interrelated problems. While it has long been the engine of European integra-
tion, its leadership is currently lacking. The eurozone crisis has contributed to German disillu-
sionment with the EU; popular attitudes and the priorities of German politicians have shifted
from their formerly pro-EU stance. Further, the present rift in Franco-German relations makes
effective response to the eurozone crisis particularly difficult.

THE FUTURE OF THE EU

 If not bleak, the future of the EU is uncertain. Most of our authors believe that there is a future
for the EU, and that the eurozone will persevere. What is less clear is what form the future EU
and eurozone will take. Most authors agree that the Maastricht foundation on which the euro-
zone is currently built is insufficient, and that serious fiscal and monetary policy reforms will be
necessary. They also concur that political integration must deepen in order to catch up with the
current level of economic integration. Finally, many argue that survival of the eurozone is cru-
cial for the sustained viability of the EU.
 The continent is entering a period in which politics is being renationalized and distrust for inte-
grationist schemes is increasing. Growing national divergences in economic models and per-
formance increase the prospects for a multispeed Europe, in which ad hoc subgroupings of EU
member states pursue cooperative arrangements when convenient. The momentum toward
more and more consolidation of sovereignty in Brussels is greatly diminished.
 By exposing the EU’s fault lines, the eurozone crisis presents an opportunity for progress—
though it is unclear who, if anyone, will seize it. If the EU is to regain strength and vitality, there
is a desperate need for policy innovation. While there has been some progress toward new fi-
nancial regulations, the necessary overhaul of EU economic governance has stalled. And, as sev-
eral authors suggest, stronger European fiscal policy integration is necessary to kick-start eco-
nomic growth. Without creative policy solutions backed by political will, the European econo-
my may languish—with substantial effects on Europe’s ability to develop politically, engage as a
unified geopolitical actor, and contribute to the North Atlantic Treaty Organization (NATO).
 Even if the needed reforms do not occur, it is difficult to envision EU member states backsliding
into significant internal economic and political (much less strategic) competition. Absent a re-
newed sense of purpose, clearly defined goals, and a greater commitment from national leaders
and publics, the European project is more likely to stall than come apart.
 The EU remains the best-developed model of regional integration and will continue to serve as
an example for other regional groupings. To the extent that other regions ever attempt political
and monetary union, the EU will provide valuable lessons on what to do and what not to do.
 3

WHY THE EU MATTERS TO THE UNITED STATES

 Strength in numbers: The EU is a stronger and more capable partner for the United States than
individual European nations. The collective force of EU soft power on important global gover-
nance issues—from climate change to foreign aid to nonproliferation—is substantial. The Unit-
ed States benefits from an EU that speaks with a unified voice, and that is capable of following
through on its commitments.
 Burden sharing: Given overlap between EU nations and NATO allies, the EU shares U.S. priori-
ties on many security and defense issues. From Afghanistan to the Indian Ocean, European mili-
tary and diplomatic resources provide an important complement to U.S. efforts. Unfortunately,
inward-looking and cash-strapped European nations are less likely to meet their burden-sharing
obligations, undermining transatlantic relations as well as U.S./NATO strategy in critical re-
gions.
 Economic stability: With interlinked, globalized financial markets, the United States benefits
from macroeconomic stability in the EU. Dissolution of the eurozone would unsettle global
markets and pose a great risk to American companies with exposure to euro exchange rate fluc-
tuations and eurozone debt.
 Peaceful Europe: The United States’ postwar support for European integration became one of
the greatest diplomatic success stories of the past sixty years. The United States is heavily in-
vested in maintaining peace on the continent, as well as a firm basis for cooperation within
NATO.

IMPLICATIONS FOR REGIONALISM AROUND THE GLOBE

 Despite the euro crisis, the EU remains the world’s most advanced regional integration project.
Even if the EU’s experiment with a common currency proves to be a failure—which is unlike-
ly—the union’s experience suggests that even regions with a long history of war can successfully
unify and pool sovereignty within common institutions. Modern European history shows that
regionalism can yield a substantial peace dividend. For many other regions, the promise of sta-
bility alone might prove a sufficient impetus for embarking down the road of integration.
 Of course, beyond Europe, regionalism may take a substantially different form. Currently, re-
gional organizations like the Association of Southeast Asian Nations, the Organization of
American States, and the African Union serve as forums for cooperation and communication,
rather than decision-making bodies whose policies supersede those of member states. While
these regional arrangements will probably build greater capacity over the next decade, their
work will remain focused on promoting economic development, trade, and peace and security—
not political and monetary union.
 4

Eurozone Crisis as Historical Legacy: The Enduring Impact of

German Unification, Twenty Years On
Mary Elise Sarotte

INTRODUCTION

As former U.S. secretary of state James A. Baker III once observed, “Almost every achievement con-
tains within its success the seeds of a future problem.” The eurozone crisis of 2010 provides a trench-
ant example of this phenomenon. When the long-sought but controversial implementation of an
European Monetary Union (EMU) finally began—as part of the bundle of deals that produced Ger-
man reunification twenty years ago on October 3—it represented a significant accomplishment.
Though the idea of a single European currency had been around at least since the Werner Plan of the
1970s, German reunification provided the necessary catalyst. For all the success of that achievement,
however, it left behind fateful seeds, which sprouted into the 2010 crisis.
The eurozone crisis resulted not only from the economic woes of weaker member states but also
from flaws in the Maastricht Treaty and from Germany’s long-term decrease in interest in European
cooperation. Since a crisis is a terrible thing to waste, the members of the eurozone should use the
sovereign debt debacle of 2010 as a second “1989 moment.” They should retrofit the eurozone with
the greater political institutionalization needed in the postCold War era—a goal that Germany
sought but failed to achieve at the end of the Cold War and now no longer prioritizes. In other words,
the best way to deal with today’s issues is to finally address two decades of unfinished business.

THE BARGAIN OF 198990

European integration, and especially monetary integration, has a long history of “stop-and-start” ac-
tivity. The 1970 Werner Plan was a prime example: it originally called for an EMU within a decade,
but each subsequent effort stalled short of implementation. The prospect of denationalizing currency
and surrendering control over a fundamental tool of statecraft—currency valuation—was daunting
to the member states of the European Community (EC). Politicians knew that they risked running
afoul of voters if they surrendered too much sovereignty. West Germans, in particular, felt an ex-
tremely strong attachment to their postwar currency, the deutsche mark; for them, it was synony-
mous with the economic renewal, prosperity, and stability of the Cold War years, following on the
trauma of the Weimar and Nazi eras. Beyond political worries, national capitals clashed over the
question of independence for a future European Central Bank (ECB): West Germans cherished their
independent Bundesbank and felt certain that it should have independence; the French prioritized
political control over central bankers and how strict the convergence criteria should be—that is, how
much inflation and sovereign debt would be acceptable.
It took the opening of the Berlin Wall on November 9, 1989, and the actions of two decisive lead-
ers—West German chancellor Helmut Kohl and French president François Mitterrand—to cut
 5

through the controversy and make the single currency a reality. Historian David Marsh singles out
the bargain that Kohl and Mitterrand negotiated in 198990 as “the essential deal that launched
Europe on the Maastricht monetary union path.” The deal originated in the work of European
Community Commission president Jacques Delors. Heading an eponymous committee, Delors
made a fresh effort to map out a path to EMU in an April 1989 report. He found that the critical step,
from which all else would follow, would be to convene an intergovernmental conference (IGC) for
the purpose of implementing a single currency. However, the Delors Committee Report left dead-
lines vague, jeopardizing the prospects for its success.
With the collapse of the Berlin Wall, Mitterrand saw an opportunity for rapid convocation of
Delors’s IGC. He understood that the wall’s collapse would motivate Kohl to seek German reunifica-
tion, and he realized that the smart move would be to embed increased German strength in a mone-
tary union as soon as possible. Both Mitterrand and Kohl realized that it would be extremely difficult
to reunite Germany if EC members became worried about a threatening resurgence of German na-
tionalism. Kohl always believed strongly in European integration; the opening of the wall did nothing
to undermine his trust in Konrad Adenauer’s saying that “German problems can only be solved un-
der a European roof.” Kohl fundamentally agreed with the goal of a common currency, although he
had previously indicated that it should be accomplished in future decades. Nevertheless, he under-
stood that West German voters, a majority of whom favored European integration and worried
about the costs of rebuilding East Germany, would resist a go-it-alone reunification process that
alienated the EC. Given France’s weight in the EC, this meant that Kohl needed Mitterrand’s ap-
proval to proceed.
In return, Mitterrand asked that Germany assent to move toward a single currency as soon as pos-
sible, with the crucial IGC convening by the end of 1990. Mitterrand further insisted that the open-
ing of the IGC be announced in December 1989 during the French presidency of the European
Council. If the French president could preside over a significant declaration about the future of
European integration on French soil, Mitterrand would advocate within the EC for German unifica-
tion. In the interest of success, Mitterrand acceded to German wishes for the full independence of a
future ECB. Mitterrand’s offer was well framed—Germany would get a currency union largely on its
terms, but Kohl would have to compromise on timing. Kohl agreed to Mitterrand’s bargain.
Consequently, the 1989 Strasbourg summit announced both the opening of the IGC and the EC’s
favorable attitude toward German unification. The IGC commenced roughly a year later in Rome,
on December 15, 1990, and completed its work in December 1991 in Maastricht. In the end, the EC
convened two IGCs in December 1990—one on EMU and another on political union between the
EC’s member states. During this period, the West German officials pushed for integration and hoped
to combine the single currency with a matching increase in political institution-building. Mitterrand
was willing to consider robust economic governance of the eurozone, but was loath to create new
political institutions, and he prevailed—Europe would share a currency but not a treasury.
It is surprising and somewhat ironic that Kohl and Mitterrand achieved one of the greatest feats in
the history of money. Neither had expertise, or even interest, in economic and monetary matters,
apart from their political impact. Indeed, the despairing president of the Bundesbank in the 1980s,
Karl Otto Pöhl, told the Financial Times—while he and Kohl were both in office—that the chancellor
knew nothing about economics.
 6

THE MAASTRICHT TREATY AND ITS LEGACY

In the mad rush toward German unification and EMU, the IGC’s grand bargain overlooked critical
details. The final Maastricht Treaty, ratified in 1992, contained insufficient crisis contingencies;
monetary union proceeded without real political coordination and with excessive faith in the om-
nipotence and omniscience of financial markets. The treaty’s implementation relied on a hope that its
terms would become self-fulfilling, obviating the need for real enforcement.
The Maastricht Treaty established convergence criteria specifying that general government
budget deficits of potential members should not exceed 3 percent of gross domestic product (GDP).
The treaty fixed the permitted ratio of government debt-to-GDP at 60 percent. Potential participants
were to have, over the year prior to joining, an average rate of inflation that did not exceed the per-
formance of the best three member states by more than 1.5 percent. Similarly, they were to have av-
erage nominal long-term interest rates that did not exceed the best three by greater than 2 percent.
The later Stability Pact, requested by the Germans, supplemented these criteria by, in theory, levying
fines on violators. Further, the so-called no bailout clause specified that member states should not be
liable for, nor assume, the commitments or debts of any other. The ratification of the Maastricht
Treaty also started an irrevocable countdown toward implementation of EMU among qualifying
countries by 1999. Finally, as part of this treaty, the EC reestablished itself as the European Union
(EU). While this decision had some practical effects, such as greater cooperation in producing a
Common Foreign and Security Policy (CFSP), the effects were nowhere near as profound in the po-
litical arena as they were in the economic realm.
As the eurozone crisis demonstrates, the hope that the Maastricht criteria could run the common-
currency area in lieu of careful economic governance proved false. Six factors explain Maastricht’s
failure. The first is the momentum acquired by the growing membership of the single currency. Pol-
icy-makers wanted the new currency to succeed, and started using the number of members and appli-
cants as an oversimplified metric of success, thereby allowing weaker economies to join without due
scrutiny. Such laxness allowed the entry not only of members with ratios of debt-to-GDP well in ex-
cess of 60 percent (Belgium, Italy) but also of applicants like Greece, which not only flouted the rules
but also falsified its records. Second, once accepted into the union, weaker member states could bor-
row at roughly the same interest rate as Germany due to the ECB practice of treating the sovereign
debt of all eurozone members equally at its discount window. This practice contributed to increased
spending without reference to what nations could actually afford. Third, more members in the cur-
rency area meant more seats at the table, rendering decision-making about enforcing criteria more
difficult.
Fourth, German attitudes soured on European integration. After the onset of the housing bubble
crisis in the United States and the bankruptcy of financial institutions such as Bear Stearns and Leh-
man Brothers, Berlin signaled that each individual European country would look after its own banks.
With unification long a fait accompli, and populist resentment toward paying for the sins of other
Europeans, German chancellor Angela Merkel ceased to prioritize repairs to the “European roof.”
Given the state of the eurozone, it is no longer possible to deny a fifth problem: the insufficiency
of the Maastricht Treaty. Neither the mere existence of a no bailout clause nor the action of financial
markets was, in fact, sufficient to prevent the need for bailouts. Even worse, the treaty contained no
guidelines indicating how to proceed if inter-European economic rescue became necessary. Lacking
guidance, European leaders held a series of panicky meetings in spring 2010, culminating in the May
 7

decision by most eurozone members to pay €500 billion in bailout, and by the ECB to intervene in
markets to buy debt. Merkel insisted on involving the International Monetary Fund (IMF), which
gave €250 billion in a political move meant to ensure that Europeans would not bail out Greece alone
and subsequently face voter wrath.
Sixth, and finally, the crisis spotlighted the weakness of eurozone economic governance. Member
states had not wanted to impose overly strict penalties on treaty violators, in case they themselves fell
into difficulties. Germany in particular was in a sensitive spot. The expense of renovating East Ger-
many and the unrealistic one-to-one exchange rate between eastern and western marks inflated its
money supply, destroyed already weak Eastern industries, and increased the final bill for unification.
Germany’s economic competitiveness declined, with the result that the member state expected to act
as the guardian of monetary union standards failed to meet the Maastricht criteria itself. Germany
had to ask, humiliatingly, for lenient implementation of the Stability Pact it had insisted upon, and the
EU agreed. After such circumstances it was much harder for subsequent German governments to act
in a holier-than-thou fashion toward any other member with economic woes. The fact that the
French also found themselves in a fiscal hole for much of the 1990s only compounded the problem.

CONCLUSION: IMPLICATIONS FOR TODAY

The 2010 crisis has had some fortunate consequences. It exposed weaknesses within individual coun-
tries and in the Maastricht Treaty. It confirmed that the eurozone cannot rely on financial markets to
address its own weaknesses. It revealed that some kind of permanent bailout procedure is necessary.
And it showed that European leaders are still grappling with the seeds sown by the rapidity with
which both German unification and the Maastricht Treaty were achieved.
The challenge now is governance reform, not expulsion of member states. Reverting to national
currencies would drive the values of reissued southern currencies into the ground and the deutsch
mark into the sky, thereby undermining Germany’s export competitiveness and job market, to say
nothing of the collateral damage to the EU and the single market. The eurozone crisis should not sig-
nal the end of the euro but rather the start of a long-overdue overhaul. The idea of a European Mone-
tary Fund endorsed by Wolfgang Schäuble—an elder statesman from the days of German unification
and now a subordinate of Chancellor Angela Merkel—faded after Merkel dismissed it, but deserves
broader support. Germany also needs to reconsider its calls for painful fiscal discipline on the part of
the weakest countries until their economies regain footing. Ideally, but perhaps not realistically,
Merkel should return to previous German form and spearhead a revision of the Maastricht Treaty,
leading a fresh effort to do for political union what Kohl and Mitterrand did for monetary union.
The unlikelihood of such a move exemplifies a fundamental problem within the whole EU: there
exists a built-in tension between the lofty goals of integration and member states’ collective unpre-
paredness to think through the consequences of their ambitious project. The great achievement of
the past has been to reconcile these contradictory impulses by focusing on practical agreements. It is
time to do so once again, and to realize that the necessary consequence of monetary union is greater
political union. European integration has already transformed most of a famously bellicose continent
into a stable zone of peace. Europeans should learn from the woes of 2010 and use them to produce
momentum and legitimacy for deeper integration.
 8

A New Reality for the European Union

Katina Barysch

INTRODUCTION

With a rescue package for Greece and a financial safety net for other eurozone economies squared
away, the European Union (EU) finally has a moment to reflect on the political consequences of the
eurozone crisis. In the aftermath of the crisis, a new EU reality has emerged; the dynamics that
pushed the European project forward over the past sixty years can no longer be relied on to drive
future integration. The crisis has brought to light, and accelerated, a number of trends already visible
in recent years: decision-making power is shifting from Brussels to the national capitals of EU mem-
ber countries, two-speed Europe is becoming a reality, the ideal of an egalitarian Europe is giving way
to the reality of political dominance by larger countries, and the alliance between France and Germa-
ny—long the motor of European integration—is weakening.
Underlying and exaggerating these changes is Germany’s growing euro-skepticism. Long the en-
gine of European integration, Germany is now starting to act like a “normal” country—
understandably so, perhaps: no one would expect Britain, France, or Poland to put European inter-
ests ahead of national interests. However, it was exactly because Germany did not always behave like
the United Kingdom and France that European integration moved forward and European solutions
were possible. Even if the euro crisis can be contained, it is difficult to see how the EU could make
progress on anything—whether it is services market liberalization or a common energy policy—with
a reluctant, grumpy and inward-looking Germany at its heart.
Without renewed Germany leadership and commitment from member states to revive and streng-
then the EU, the result could be a Europe where the realpolitik of power and money counts more
than visions of integration and solidarity.

GOVERNMENTS RULE

In the past ten years, the EU has seen a gradual shift of decision-making power from the EU’s federal
institutions back to the national governments of member states. Great Britain has always been suspi-
cious of “unelected Brussels bureaucrats,” while France’s enthusiasm for the European Commission
diminished after the overly (for French tastes) free-market Jose Manuel Barroso took over as presi-
dent in 2004. But it is Germany—traditionally a strong supporter of the European Commission and
the European Parliament—that is now at the forefront of this move toward more “intergovernmen-
talism.” German support for the European Commission has progressively weakened since the days
when the mercurial Jacques Delors ran the EU’s Brussels-based executive. Nevertheless, the way Ber-
lin has recently sidelined the commission is unprecedented. When Merkel is looking for a European
solution to a problem, she phones other EU capitals directly rather than communicating directly with
Brussels. German politicians and officials have few good things to say about Barroso, whom they
 9

accuse of grabbing more and more power from member states without having a plan for using them.
Indeed, it was Merkel who insisted that Herman van Rompuy, president of the Council of EU lead-
ers, and not Barroso, be put in charge of the EU’s new working group on fixing the eurozone.
The commission has tried to regain the initiative, for example by putting forward its own propos-
als for economic governance and introducing “EU taxes” to finance the union’s central budget rather
than relying on transfers from cash-strapped national governments. However, as long as Europe re-
mains in crisis mode and EU governments are putting large sums of taxpayer money at risk to save
the euro, decision-making power will remain firmly in the national capitals. Berlin, Paris, and the oth-
er EU capitals should remember that a strong European Commission is needed to defend the union’s
achievements. For example, the commission has traditionally acted as the guardian of the EU’s inter-
nal markets; it has fought for ambitious EU climate change targets; it has resisted EU governments’
lobbying for more trade protectionism; and it has pushed for more integration in areas from banking
to rail transport.

TWO-SPEED EUROPE

Flexible integration, or “variable geometry” in EU-speak, became a reality long before the current
crisis. Only sixteen out of twenty-seven EU countries participate in the single currency; the “Schen-
gen” area of passport-free travel is not universal; and Britain and Denmark have opted out of most
EU initiatives on internal security. Further, important EU foreign policy initiatives—such as trying to
dissuade Iran from building nuclear bombs—have been run by a small group of big member states.
The EU and its governments have traditionally upheld the idea that any such flexible arrange-
ments were temporary; however, the euro crisis could lead to a semipermanent schism between the
euro ins and outs. The eurozone countries—not the EU-27—negotiated and underwrote the rescue
packages for Greece and other southern European countries. Of the non-euro countries, only Poland
and Sweden made notional contributions to the bailout in the name of European solidarity. UK par-
ticipation was conspicuously absent. Although Britain’s new coalition government—which is led by
the traditionally euro-skeptic Conservative party—has been on a charm offensive around Europe, it
has argued that the euro crisis is simply not its problem. In the past, London would try to prevent
smaller groups of EU countries from going forward with initiatives for fear of having to join later on
terms that did not suit Britain. Now the UK seems fairly happy with a Europe à la carte. This attitude
may cause resentment should other troubled eurozone countries be forced to borrow money from
the new European stability facility (a €440 billion fund to help eurozone countries that can no longer
borrow in the markets). With UK-based banks highly exposed to Irish and Spanish debt, Britain
would be a major beneficiary of a Spanish or Irish bailout without having contributed.
Germany still insists that a move toward stronger economic governance should take place at the
level of the EU-27. It has resisted French calls for a permanent Euro Council—a meeting of the lead-
ers of the sixteen eurozone countries independent of the regular EU-27 summits. Even so, Germans
have conceded that such meetings could take place on an ad hoc basis—as happened several times
during the euro crisis. For the non-euro countries, a Euro Council raises the specter of being perma-
nently pushed to the sidelines. The so-called Euro Group—the meeting of the finance ministers of
the sixteen euro countries—already precooks decisions on a wide array of economic issues. Similarly,
regular Euro Councils would probably take on an expansive agenda beyond fiscal rules and economic
monitoring, thereby weakening the voices of non-euro countries on issues ranging from financial
 10

market regulation to competition policy. Since many of the EU’s most pro-market countries are out-
side the euro, such a two-tier Europe could move toward less liberal economic policies.

SIZE MATTERS

In a more intergovernmental union, bigger countries would have greater influence than smaller ones,
which is why the EU’s smaller member states are staunch supporters of the “community method” of
decision-making, which gives a big role to the European Commission and parliament. However, in
recent years, the idea that all EU countries are equal has lost credibility. With twenty-seven member
countries, it is increasingly difficult to achieve consensus, and leaders from the big countries often
talk to each other first to shape a preliminary agreement.
Angela Merkel initially promised to pay more attention to the smalls, but the euro crisis ruptured
any illusions about where the real power lies in Europe. The momentous decisions about the bailout
were made by the big euro countries and presented to the others as a fait accompli. This may have
suited some EU governments at the height of the crisis: Austria, Finland, and the Netherlands, for
example, wanted tough conditions for Greece just as much as Germany and they were happy to let
Merkel do their bidding. The Mediterranean countries relied on France as their mouthpiece. Others,
like Slovakia, felt plainly and painfully ignored. A newly elected Slovak government decided in Au-
gust that it did not want to hand money over to the much richer Greeks. Since the smaller countries
are finding it harder to make their voices heard—let alone to set the agenda—they could become
more prone to drastic action, such as vetoing agreed EU policies or simply opting out unilaterally.
Notions such as equality and solidarity—which underpin the very idea of European integration—
could unravel.

FRANCO-GERMAN LEADERSHIP

Although Merkel consults Paris more often than Brussels or any other EU capital, the Franco-
German alliance is anything but strong. French and German positions often fall on opposite ends of
the policy spectrum, especially when it comes to European economic management. A clash in politi-
cal style further accentuates the rift between the two countries. Merkel tends to approach issues with
cautious, cold analysis. The chancellor starts from the final objective and focuses on feasible solu-
tions; she likes to under-promise and over-deliver. At home in Germany, this approach made her
consistently popular with voters, at least until recently. At the EU level, however, Merkel’s cautious
approach contrasts with the impulsive style of French president Nicolas Sarkozy, who likes to an-
nounce ambitious objectives without quite figuring out how to get there.
Merkel and Sarkozy have learned from bitter experience that they can achieve little if they work
against each other. Consequently, they think that the first and indispensible step toward an EU-wide
consensus is a French-German rapprochement. However, close consultation and collaboration be-
tween Berlin and Paris at the height of the crisis neither resolved their differences nor forged mutual
trust.
In the past, Merkel would get upset about Sarkozy’s unilateral initiatives, such as the Mediterra-
nean Union or the idea of a European bank bailout fund. Now Germany is itself becoming unilateral-
ist: after Berlin announced its national ban on the naked short-selling of German bank stocks and
 11

eurozone bonds in May, France protested that it had not been consulted and initially said that it
would not follow suit.
For much of the history of the European Union, the alliance between Germany and France was
the main motor for integration. As the number of EU countries has continued to grow, the influence
of the two-country alliance has weakened. But agreement between Berlin and Paris remains a condi-
tion for accomplishing anything in the union today. The euro crisis will make it harder to paper over
Germany and France’s differing interests and ideas about the future of the EU.

GERMAN EURO-SKEPTICISM

The eurozone crisis is bringing a latent sense of German frustration and disillusionment with the EU
to a boil. With the German media in a frenzy and Merkel’s government weakened by coalition
squabbles and losses in regional elections, German euro-skepticism may now take hold. While Ger-
many’s belated and ill-tempered reaction to the eurozone crisis surprised many, the country’s attitude
toward the European Union has been cooling for over a decade. Underlying this shift are a number of
structural and historical factors.
First, Germany is now run by a group of leaders with no living memory of the horrors of World
War II. For the first four decades after the war, the Germans’ main aim was to merge into the Euro-
pean Union and the North Atlantic Treaty Organization (NATO). Postwar Germany could have a
foreign policy only as part of a European club or a western alliance. Within the EU, the Germans saw
their role as a facilitator of compromise and they were happy to foot the bill if necessary, as with
Helmut Kohl’s famous checkbook diplomacy. Today, many Germans think they have paid their his-
torical dues. Already with Gerhard Schröder, Germany had a chancellor who was much less emo-
tionally attached to—and much less idealistic about—the European idea. Merkel has continued along
this trajectory. For the generation of Helmut Kohl, Europe was a matter of war and peace; for Chan-
cellor Merkel and most of her contemporaries, it is a question of costs and benefits.
Second, during the Cold War, Germany was a frontline state. Membership in NATO and the EU
seemed a matter of survival. Following the accession of ten former Warsaw Pact countries to the EU
in 2004 and 2007, Germany is now surrounded by friends. In such a safe environment, Germany can
define its national interests differently. Eastward enlargement has also changed the political dynam-
ics of the EU—in a union with twenty-seven member states, Germany can no longer equate its na-
tional interest with that of the EU, even if it wants to. The EU is simply too big and too diverse.
Third, Germany’s traditionally pro-EU elites appear increasingly detached from the European
cause. Even the few remaining federalists rarely make the case for deeper and faster European inte-
gration. Instead, they grumble that whenever they tried to move European integration forward, their
fellow members wanted nothing of it. Today, the once rock-solid cross-party consensus in favor of
more integration is crumbling. The German constitutional court—traditionally the most highly res-
pected political institution in the land—has set the national tone by ruling that the EU’s latest treaty
(the Treaty of Lisbon) took the union as far as it should go for now.
Germany’s elites are fully aware how much their country has benefited from the EU: it has gained
markets for its exports, a common currency that is stable but not too strong, friendly neighbors, and
the ability to act on the world stage. Puzzlingly, successive German governments—as well as Germa-
ny’s business leaders and newspaper editors—have been rather reticent when explaining these bene-
fits to the German people. Many ordinary Germans think that EU integration was a sacrifice they
 12

made for the benefit of other European countries. A majority now feel that giving up the Deut-
schmark for the euro was a grave mistake. During the euro crisis, this growing sense of euro-
skepticism has been whipped up by a vitriolic campaign in the German mass media—something that
would have been unthinkable even a few years back.

THE WAY FORWARD

If the EU is to continue to function, some damage limitation is needed. The German government
must show constructive leadership in the euro crisis. Leadership should include greater willingness to
discuss Germany’s own contribution to strengthening European demand, as well as presentation of a
vigorous case to the German people that saving the euro, and the achievements of European integra-
tion, lie at the heart of German national interest. Germany’s European partners, in turn, should be
more sympathetic to Merkel’s domestic constraints. If they want Berlin to engage in an open debate
about how to reduce the damaging imbalances in the eurozone, they must accept the German mantra
that solidarity only works alongside responsibility (in the shape of rigorous national plans for long-
term budgetary consolidation). They should also remember to highlight some of the strengths of the
German economic model. Further, EU countries outside the eurozone should acknowledge that the
fate of the single currency is of pivotal importance for them too—and act accordingly. Without such
an attitudinal shift, a permanent split between eurozone countries and those outside the single cur-
rency is inevitable.
Finally and crucially, both Berlin and Paris must do their best to overcome current frictions and
turn the Franco-German alliance once again into a positive force in EU integration. The EU can only
function with twenty-seven well-meaning governments and strong central institutions. If the big
countries ignore the voices of the smaller ones and try to sideline the European Commission, achiev-
ing consensus in the EU will become impossible and many of the union’s remarkable achievements
may unravel.
 13

The Potential Twilight of the European Union

Charles A. Kupchan

INTRODUCTION

The European Union’s (EU) trillion-dollar loan package succeeded in quelling the financial mael-
strom spawned by Greek debt. Nonetheless, the financial crisis has taken a painful toll on many EU
members, and high national debts and the uncertain health of the continent’s banks may mean more
trouble ahead.
Although these economic woes have of late captured the headlines, they pale in comparison with a
more serious malady: Europe’s historic experiment in political union is faltering. As the poisonous
politics that delayed the EU’s rescue of the eurozone revealed, Europe is experiencing a renationali-
zation of political life. The project of European integration, which has steadily advanced since the
bitter years after World War II, has been thrown into reverse as its members claw back from the un-
ion the traditional powers of national sovereignty. And the causes run much deeper than the ongoing
financial crisis, suggesting they are here to stay. Generational change, a backlash against globaliza-
tion, and the absence of a compelling vision of Europe’s place in the world may well mean that the
European Union is running out of steam.
The EU’s uncertain future has enormous stakes for Americans as well as Europeans. Europe re-
mains the United States’ go-to partner on every front—from stewardship of the global economy to
curbing global warming to bringing stability to Afghanistan. With U.S. debt soaring and Americans
tiring of the wars in Iraq and Afghanistan, Washington could certainly use a collective EU capable of
shouldering greater global burdens. Instead, the renationalization of the EU threatens to consign its
twenty-seven individual member states to geopolitical irrelevance. The recent backsliding, if it con-
tinues, has the potential to compromise one of the most significant and unlikely accomplishments of
the twentieth century—an integrated Europe at peace with itself, seeking to project power as a cohe-
sive whole.

THE COMEBACK OF THE NATION

Germany has been the economic and political engine behind European integration, motivated by its
obsession with banishing the national rivalries that long subjected Europe to great power war. But
Berlin’s recent reluctance to come to the rescue of Greece—Chancellor Angela Merkel resisted the
bailout for months—constituted a breach of the spirit of common welfare that is the hallmark of a
collective Europe. Only after the Greek crisis threatened to engulf the eurozone did Merkel override
strong popular opposition and approve the loan. Voters in local elections in North Rhine-Westphalia
promptly punished her party for doing so, delivering the Christian Democrats their most severe de-
feat in the postwar era.
 14

Such stinginess on economic matters is only the tip of the iceberg. The bigger problem is that
German enthusiasm for the EU seems to be fast disappearing. In one of the few signs of life in the
European project, member states last December embraced the Lisbon Treaty, endowing the union
with a new presidential post, a foreign policy czar, and its own diplomatic service. But Berlin then
played a leading role in selecting as the EU’s new president and foreign policy chief Herman van
Rompuy and Catherine Ashton—two low-profile individuals who would pose little threat to the vi-
sibility and authority of national leaders. Even the courts are putting the brakes on the power of EU
institutions. Last year, the German Constitutional Court issued a ruling strengthening the sway of
the national parliament over EU legislation. As Der Spiegel commented, the ruling “threatens future
steps toward European integration.”
This renationalization of politics has been occurring across the EU. A stark sign of trouble on the
horizon came in 2005, when Dutch and French voters rejected the European Constitutional Treaty,
which would have consolidated the EU’s legal and political character. The Lisbon Treaty, a watered-
down version, was then rejected by the Irish in 2008. The Irish changed their minds in 2009, but
only after ensuring that the treaty would not jeopardize national control of taxation and military
neutrality.
British voters in May brought to power a coalition dominated by the Conservative Party, which is
well known for its Europhobia. Although constrained by their partnership with the pro-EU Liberal
Democrats, the Conservatives last year showed their true colors by withdrawing from the European
People’s Party—the main center-right bloc in the European Parliament—to join a far-right bloc that
is a bastion of antipathy toward the EU.
Meanwhile, right-wing populism is on the upswing in many EU member states. It is the product
primarily of a backlash against immigration (particularly of Muslims), not against European integra-
tion. Nevertheless, this hard-edged nationalism aims not only at minorities but also at the loss of au-
tonomy that accompanies political union. Hungary’s Jobbik Party, which borders on xenophobic,
won forty-seven seats in elections earlier this year—up from zero in 2006. Even in the historically
tolerant Netherlands, the far-right Party of Freedom recently won over 15 percent of the vote, giving
it only seven fewer seats than the leading party.
If these obstacles to a stable union were not sobering enough, in July the EU’s presidency rotated
to Belgium—a country whose Dutch-speaking Flemish citizens and French-speaking Walloons are so
divided that, long after elections in June, a workable governing coalition has yet to emerge. It speaks
volumes that the country now guiding the European project suffers exactly the kind of nationalist
antagonism that the EU was created to eliminate.

THE CAUSES OF RENATIONALIZATION

This striking renationalization of European politics is the product first and foremost of generational
change. For Europeans who came of age during World War II or the Cold War, the EU enjoys a sa-
cred status; it is Europe’s escape from its bloody past. Not so for younger Europeans, who have no
past from which they seek escape. A recent poll revealed that French citizens over fifty-five are twice
as likely to see the EU as a guarantee of peace as those under thirty-six. Whereas new European lead-
ers tend to assess the value of the EU through a cold calculation of costs and benefits, their predeces-
sors viewed the European project as an article of faith. It is no surprise that matters of European inte-
gration no longer animate national politics as they used to.
 15

Meanwhile, the competitive demands of the global marketplace, coupled with the financial crisis,
are putting severe strains on Europe’s comfortable welfare state. As EU members struggle to bring
down mountainous debt, retirement ages are rising and benefits dwindling. Although European inte-
gration does more to improve than impede economic performance, the EU is often the scapegoat for
economic hardship. In France, for example, anti-Europe campaigns have focused their ire on the
EU’s “Anglo-Saxon” assault on social welfare and on the “Polish plumber” who takes local jobs due
to the EU’s open labor market.
Finally, the EU’s rapid enlargement to the east and south has further sapped it of life. Absent the
cozy and familiar feel the smaller union had before the Berlin Wall fell, its original members in West-
ern Europe have turned inward. And the new members from Central Europe, who have enjoyed full
sovereignty only since the collapse of communism, are none too keen to give it away again—even to
consensual institutions in Brussels rather than autocratic ones in Moscow. As Poland’s late president
Lech Kaczynski asserted soon after taking office in 2005, “What interests the Poles is the future of
Poland and not that of the EU.”
A cautious weariness also stems from European participation in the wars in Iraq and Afghanistan,
missions for which popular support has been sparse. In Germany, roughly two-thirds of the public
opposes the presence of German troops in Afghanistan, and the Dutch have already withdrawn their
troops. Such widespread aversion to far-flung commitments rests uneasily with the Lisbon Treaty,
which is intended in part to give the EU more geopolitical heft. Indeed, projecting Europe’s voice on
the global stage is one of the union’s raisons d’être. But this vision has no constituency; wars in dis-
tant lands, coupled with plunging defense expenditures stemming from the economic downturn, are
tempering the European appetite for greater geopolitical responsibility. After all, member states have
never shown much enthusiasm for extending the EU’s authority over security issues, instead jealous-
ly guarding their sovereignty on matters of defense.

BUYING TIME

The EU has thus far reacted to this stunning loss of momentum by entering a holding pattern. As a
leading member of the European Parliament recently explained, “The EU is now just trying to keep
the machine going. The hope is to buy enough time for new leaders to emerge who will reclaim the
project.”
Buying time may be the best the EU can do for now, but its slide is poised to continue, with costs
even for those outside Europe. The Obama administration has already expressed frustration with an
EU whose geopolitical profile is waning. As Defense Secretary Robert M. Gates complained in Feb-
ruary 2010 to a gathering of North Atlantic Treaty Organization (NATO) officials, “The demilitari-
zation of Europe—where large swaths of the general public and political class are averse to military
force and the risks that go with it—has gone from a blessing in the twentieth century to an impedi-
ment to achieving real security and lasting peace in the twenty-first.” As the United States tries to dig
itself out of debt and give its armed forces a breather, it will increasingly judge its allies by what they
bring to the table. In Europe’s case, the offering is small and shrinking.
When other unions stumbled, they suffered bloodshed. The United States enjoyed over seven dec-
ades of prosperous federation after 1789, only to descend into civil war in 1861. Yugoslavia suffered
a similar fate in the 1990s—and is now gone for good. Europe is hardly headed back to war; its na-
tions have lost their taste for armed rivalries. Instead, less dramatically but no less definitively, Euro-
 16

pean politics will become less European and more national, until the EU becomes a union in name
only. This may seem no great loss to some, but in a world that sorely needs the EU’s aggregate will,
wealth, and muscle, a fragmented and introverted Europe would constitute a historical setback.
Six decades ago, Jean Monnet, Robert Schuman, and Konrad Adenauer were Europe’s founding
fathers. Today, the EU needs a new generation of leaders who can breathe life into a project that is
perilously close to expiring. For now, they are nowhere to be found.
 17

The European Union as a Model for Regional Integration

Fraser Cameron

INTRODUCTION

While the European Union (EU) has long been the most developed model of regional integration, it
was severely shaken by the recent economic crisis, causing increasing doubts about the integration
process. The lack of a timely and coherent response to the euro crisis called into question the integrity
of the eurozone, whose structural and institutional fault lines have been revealed by the financial cri-
sis. These doubts coincide with dramatic changes in the global economic order involving the relative
decline of the EU and United States and the rise of Asia. The likely economic adjustments are already
threatening social cohesion and political stability in Europe. The crisis has temporarily weakened the
EU’s status as a model for regional integration, but as the EU recovers its confidence, as it always has
after previous crises, it will continue to be the leading example for other efforts at regional integra-
tion.

THE EU MODEL

Since the early 1950s, the EU has been a pioneer in regional integration. The most important prin-
ciples underlying the success of the EU project include:
– Visionary politicians, such as Robert Schuman of France and Konrad Adenauer of Germany, who
conceived of a new form of politics based on the supranational “community method” rather than
the traditional balance-of-power model. Support from the United States was also crucial in the
early years.
– Leadership generated by the Franco-German axis. Despite many problems, Paris and Berlin have
been and remain the driving force behind European integration.
– The political will to share sovereignty and construct strong, legally based, common institutions to
oversee the integration project.
– A consensus approach combined with solidarity and tolerance. The EU approach is based on not
isolating any member state if they have a major problem (such as Greece in the most recent crisis),
hesitance to move forward with policies until the vast majority of member states are ready, and a
willingness to provide significant financial transfers to help poorer member states catch up with
the norm.

These four tenets have guided the EU well over the years and enabled the institutions to survive
many crises, from French president Charles de Gaulle’s “empty chair” tactic of withdrawing French
representatives from EU political bodies in protest of moves to introduce qualified majority voting
(QMV) to failed referendums on new treaties in a number of member states, including rejection of
the Constitutional Treaty by France and the Netherlands in 2005 and the Lisbon Treaty by Ireland in
 18

2008. More recently, the EU has adopted a more flexible approach resulting in a multi-speed Europe
with several tiers of integration. For example, not all member states are in the eurozone, or in the
Schengen passport-free zone; this arrangement has allowed some of the more Euro-skeptic countries
such as the United Kingdom to opt out of certain obligations. Nevertheless, the core tenet of the EU
is readiness to share sovereignty and operate through strong common institutions.

OTHER REGIONAL GROUPINGS

There have been several attempts to achieve regional integration outside of Europe—including the
Association of South East Asian Nations (ASEAN), African Union (AU), Gulf Cooperation Council
(GCC), and Mercosur in South America—but they have all failed to achieve anything resembling the
progress of the EU. ASEAN is the most advanced of these efforts and regularly sends delegations
to Brussels to seek ideas from the EU experience; however, ASEAN remains a strictly inter-
governmental body and there is no indication of interest in sovereignty sharing. It is a similar story
elsewhere: no other regional body is anywhere near the EU in terms of political or economic cooper-
ation, let alone integration. Indeed, no other grouping has even gotten to first base in terms of the
basic requirements of integration, namely dealing with historical reconciliation and developing the
necessary political will. There have been innumerable declarations from groupings in Asia, Africa,
the Middle East, and South and Central America about the desirability of closer cooperation and
even integration, but the record shows that the rhetoric has not been matched by action. Although
the EU is also guilty of exaggerated rhetoric, it has steadily moved forward—even if on occasion it
seems to take two steps forward, one step back.
As the EU’s experience demonstrates, historical reconciliation is a critical element in developing
the necessary political will for cooperation and, ultimately, integration. The fundamental basis for the
success of the EU is the historical reconciliation between France and Germany, achieved by years of
sustained political effort from the leaders of both countries. In stark contrast, there has been no such
effort in many other parts of the word where there are ambitions of regional integration. In East Asia,
for example, there can be no integration without genuine reconciliation between Japan and China,
and Japan and Korea. The East Asia experience is replicated elsewhere with unresolved problems and
deep suspicions between, for example, Brazil and Argentina, India and Pakistan, and Saudi Arabia
and its neighbours. Only after historical reconciliation can countries proceed gradually along the var-
ious steps required to create a regional community such as a free trade area, a customs union, a single
market, a single currency, a common passport area, and a common foreign policy.

THE STATE OF THE UNION

Compared to most other regions of the world, the EU is a haven of peace, prosperity, and security.
Following the global economic crisis, however, there are several major challenges facing the EU that,
if not tackled with urgency and determination, could threaten the entire European project. Namely,
the EU has grown and integrated rapidly without commensurate strengthening of its political and
economic institutions. The emerging gap between necessary coordination and institutional capacity
in the EU suggests a lesson for other regional groupings if and when they arrive at later stages of the
integration process.
 19

The first challenge is increased fiscal coordination amid a worsening economic outlook. The EU
needs to cleanse the financial system and follow through on austerity measures introduced by almost
all member states. The situation in late summer 2010 is less critical than it appeared in the spring,
when many doomsayers were predicting the collapse of the euro and even suggesting the EU might
break up. The major risk today is the continuing fragility of the economies of some eurozone mem-
ber states such as Greece, Spain, and Portugal, and the possibility of renewed speculation in the fi-
nancial markets. Although there are some positive signs of economic recovery in Europe, many
economists continue to warn of a possible “double dip” recession and the likely impact of the ongo-
ing problems of many European banks. While most passed the “stress tests” at the end of July 2010,
there was broad agreement that these tests were not as strenuous as they could have been.
The economic troubles of the past few years come amid major, secular shifts of wealth toward
Asia. The EU’s share of global GDP declined from 24 percent to 22 percent between 1990 and 2010.
In addition to sluggish economic growth compared to emerging markets like Brazil, Russia, India,
and China, the EU is losing competitiveness. The European labor force is aging and increasingly pre-
fers leisure to work. There are insufficient resources devoted to innovation. The Lisbon Strategy that
sought to make the EU the most competitive region in the world by 2010 was a conspicuous failure.
The latest 2020 plan, with its similarly lofty ambitions, is likely to fare no better. Rising energy and
commodity prices have a negative impact on growth in Europe. Going forward, it is difficult to see
how Europe, with its largely immobile and aging population, can compete with the labor markets of
Asia, which are unburdened by health or unemployment costs. The Asian development model not
only poses challenges to the Anglo-Saxon capitalist model but also to the creation of a reformed,
rules-based system of global governance. Few Asian nations are willing to accept EU and U.S. pres-
sure on social, labor, and environmental issues, arguing that they would be disadvantaged at a critical
stage in their development.
The response of Europe to these troubling circumstances should be obvious: the eurozone will be
safe only when discipline is matched by solidarity between the member states of the zone, a very se-
rious challenge for the balance between Germany and the other eurozone countries. A single Euro-
pean voice is needed in all forums of global economic governance, including discussions on climate
change and energy security. But this will not be easy to achieve given the continuing attachment most
EU member states have to their own seats or shared constituencies in the international financial insti-
tutions. The Copenhagen climate change conference in December 2009 also revealed the EU’s
weakness as an international actor. Though it reached a consensus and promoted climate change to
the top of the global agenda, the EU was unable to assert itself at the most critical juncture.
The second challenge is resolving the EU’s long-standing identity crisis. Member states have never
been able to agree on the finalité politique, making the European experiment a journey to an unknown
destination. Academics have described the debate as one between widening and deepening. On the
one hand, the EU has progressed from a customs union to a single market and a eurozone of current-
ly sixteen (soon seventeen) countries; on the other hand, it has gradually extended its membership
from six to twenty-seven countries—with more to join—covering almost the whole continent. The
EU, however, has proved unable to strengthen its political institutions at a pace and with a depth con-
sistent with the needs of its integration, as well as the number and heterogeneity of its membership.
Faced with widespread public skepticism about the EU, European capitals remain attached to nation-
al sovereignty and reluctant to give great powers to Brussels. Furthermore, France and Germany re-
 20

main divided on the issue of economic governance, and questions linger over the EU’s final eastern
borders.
Many hoped that the Lisbon Treaty would provide the impetus for a further deepening of the EU,
but the long struggle to achieve ratification of the treaty and the shattering impact of the financial
crisis has revealed little appetite for further institutional changes. As noted above, there is little public
appetite for “more Europe,” and national politicians seem increasingly reluctant to make the case for
a strong EU. Germany is the most noticeable example—previously the strongest champion of closer
integration, it has moved into the skeptic camp mainly due to public doubts about the euro, reflected
also in judgments of the supreme court. There are, however, some experts and politicians, such as
Nicolas Sarkozy, president of France, and Guy Verhofstad, the former Belgian prime minister and
current leader of the Liberals in the European Parliament, who argue that the best response to the
crisis is indeed a radical step forward toward a form of economic governance in Europe. They believe
that the EU is severely handicapped by the eurozone’s weak central institutions and the insufficient
regulation of its financial and energy markets. Unfortunately, Sarkozy and Verhofstad’s recommen-
dations have met with a lukewarm response from Germany and other member states.

VALIDITY OF THE EU MODEL

There is little doubt that the recent crisis has affected the EU as a model for regional integration, but
the fallout will be temporary. Historically, the EU has rebounded from previous crises and often leve-
raged adversity to move to the next stage of integration: the failed plan for a European defense com-
munity in 1954 led to the creation of the European Economic Community three years later; the emp-
ty chair crisis of 1965 led to de facto acceptance of QMV and later de jure acceptance as a result of the
1986 Single European Act; the currency tribulations of the 1980s led to the European Monetary Sys-
tem and ultimately the euro; and the collapse of communism in Europe led to agreement on estab-
lishing a common foreign and security policy and the widest enlargement in the EU’s history.
With regional blocs dominating the globalized economic and financial system, EU member states
acting alone will be unable to achieve the results that could be gained through a 500-million-strong
bloc. Already the United States is pressing for a reduced number of EU seats in the Group of 20
(G20) and global financial institutions. Over time these changes are likely to give a further impulse to
the integration process. Meanwhile, a “multi-speed Europe” is inevitable for the foreseeable future,
with a strengthened eurozone increasing the gap between the EU’s hard core and its outer periphery.
How do other regions view the EU post-crisis? While there has been some unfavorable media
attention, governments and other regional bodies have retained faith in the union. Significantly, nei-
ther China nor Russia attempted to sell their substantial holdings of euros. Between April and
August 2010, the euro fell from over $1.40 to $1.15 before recovering to settle above $1.30. To most
European exporters this is a reasonable exchange rate—at $1.50 they were finding it difficult to sell
abroad.
The EU’s problems did not affect the plans of other regional groupings to move forward with co-
operation. ASEAN, for example, went ahead with proposals to establish an ambassadorial steering
committee, similar to the one in Brussels, which is known as Coreper. Japan, China, and Korea have
intensified their trilateral ministerial meetings with a view to establishing closer East Asian coopera-
tion. While the GCC has postponed plans for monetary cooperation, this decision resulted more
from regional rivalries than any knock-on effect from the problems of the eurozone.
 21

What are the lessons for other regional integration efforts? There is much that can be learned
from the EU and its responses to various crises, including that of spring 2010. At the same time, the
EU is a sui generis organization and how its members deal with a crisis may not be relevant to other
less-advanced groupings. For example, if one were to take monetary union as an objective, then it
would seem clear in hindsight that a more integrated political and economic structure would be ne-
cessary to monitor public debt and help prevent speculation. But no other grouping is anywhere close
to a customs union or single market, let alone a common currency.
Integration is a difficult process and there will invariably be setbacks and crises. Nevertheless, in
the EU case, the Cassandras are nearly always proven wrong. The EU has an excellent record of re-
covering from crises and moving ahead even stronger than before due to firm political will. The re-
sounding lesson of the EU model, then, is the necessity of genuine investment by member states in
the goal of regional integration. While not always politically expedient, national governments would
be wise to put the long-term goal of cooperation above more immediate domestic priorities. More
importantly, if integration is to succeed, governments and publics should believe that it is in their vital
national interest. Without such commitment, regional groupings will crumble at the first bump in the
long road to integration.
 22

The Eurocrisis and the Uncertain Future of European Integration

Kathleen R. McNamara

INTRODUCTION

Eurocrisis? What eurocrisis? This August, the streets of Florence, Barcelona, and London were full of
Europeans on their (unimaginably long) holidays, acting with apparent disregard for the dire predic-
tions in the press of a European Union (EU) on the verge of bankruptcy and dissolution. Meanwhile,
financial markets backed off from their attacks on the PIGS (Portugal, Ireland, Greece, and Spain)
while those porcine countries moved forward with significant reforms, slashing their deficit and debt
levels. German growth in the last quarter has driven eurozone growth to above U.S. levels, giving
pause to euroskeptics and glee to euroboosters on both sides of the Atlantic.
And yet the EU is far from out of the woods. The past two years of global economic upheaval have
sorely tested the EU’s Economic and Monetary Union (EMU) and its crowning achievement, the
euro. At base, the problem is simple: the EU is an outlier in political and economic history, and mar-
kets do not know what to expect from its unique combination of a single currency and separate na-
tion-states. The eurozone crisis reveals the challenges of the EU’s sui generis political status—no
longer a mere collection of nation-states, yet not a fully fledged federal entity.
What, then, should we expect for the future of European integration? What does the still-
unfolding eurozone crisis mean for the larger geopolitical position of the EU? Absent a crystal ball,
any response is necessarily hazy and conjectural. Nevertheless, it is possible to sketch out some sig-
nificant milestones and signposts that will determine the path of Europe’s future. The critical ques-
tion is whether the leaders and citizens of Europe are willing to upgrade their political institutions
and equip them with the mechanisms to ease such financial and economic crises in the future. The
way these issues are resolved—or not—will fundamentally shape the broader political future of Eu-
ropean integration. The stakes are very high, and while the preliminary evidence suggests the EU is
muddling through and is far from collapse, there has been little demonstration of the political leader-
ship needed to creatively move the EU forward.

HISTORY OF INNOVATION

The EU is one of the big success stories of international politics. It is astounding that the states of Eu-
rope, so long used to dealing with each other with bayonets and tanks, are now tightly bound togeth-
er within a series of interlocking laws and institutions. Rather than shooting at each other, they spend
their time squabbling over the rules of long-haul truck transport and labeling of genetically modified
organisms. This degree of integration of sovereign nation-states is unprecedented in modern times
and has formed the basis of the peace and prosperity of Europe. In pursuing their political integration
through institutional and market means, rather than warfare and territorial acquisition, the EU has
 23

created a new type of political entity in the global system, one whose tight institutional linkages and
political community will not disintegrate any time soon.
However, the EU’s political innovation bumps up against the practical economic requirements of
monetary unions and single currencies. No monetary union has ever succeeded without concurrent
political union—including fiscal consolidation. Monetary unions are a modern invention, only com-
ing into vogue in the latter part of the nineteenth century and spreading rapidly across countries like
Italy, the United States, and Germany. The consolidation of rival currencies has always been part of
broader state-building efforts, as a single national currency aided in prosecuting wars, building up
administrative capacity at the center of a political union, and fueling the construction of a national
identity. The few efforts at monetary unions without political union, such as the Latin Monetary Un-
ion and Scandinavian Monetary Union, fell apart within years. Indeed, there are intuitive reasons
why political union supports monetary union. Difficult decisions around monetary issues are more
easily made within communities joined by broader political solidarity. Fiscal and monetary policy
work better when they are planned in concert. Thus the strange status of the European Monetary
Union: a centralized monetary authority without fiscal capacity, and a relatively weak set of political
institutions and identities.
For years, the strong ideational consensus on the policy undergirding the EMU papered over the
disconnect between political, fiscal, and monetary union. At the creation of EMU in the late 1980s,
lingering concerns over inflation and fears of an uncompetitive EU begat a firm agreement on the
need for a strong, stable currency based on the deutsche mark. Sober central bankers in Frankfurt
would run EMU and the euro with a single focus—price stability—and with a series of rules—the
Growth and Stability Pact—that would clamp down on fiscal prolificacy and instill confidence in the
euro (the fact that it was always known as the Stability Pact symbolizes the lack of attention to the
growth side of the equation). That consensus facilitated bargains between France and Germany at
Maastricht in 1992, where plans for EMU were signed into treaty law. Countries worked hard to get
within spitting distance of the austere convergence criteria for entry into EMU. Financial markets
bought Europe’s political commitment and, in advance of actual deficit reduction, made possible the
ultimate budget cuts by reducing interest rates on borrowing by highly indebted countries like Italy
and Portugal. A happy circle of self-fulfilling beliefs about Europe’s further integration predominated
and the previously unimaginable idea of a single European currency became a reality in 1999, with
euro notes and coins introduced in January 2002.
The go-go years of the dot-com expansion and the global credit bubble economy that followed al-
lowed Europe to enjoy a strong euro, fueling real estate booms across the continent and in the United
Kingdom without any serious stresses on European unity. The original EMU consensus held fast,
and economic circumstances delayed tough decisions about how to coordinate EU political econo-
mies in tough times.

NEED FOR POLITICAL, MONETARY, FISCAL UNION

Today, however, the party is clearly over, the bill has come due, and history is knocking on the door.
So what will determine whether the EU stalls in its integration project or moves forward? The cur-
rent economic narrative in Europe is unsure, fragmented, and does not provide the necessary politi-
cal foundation for extensive institutional capacity building. For now, the lack of consensus about the
correct macroeconomic formula for Europe seriously compromises any further progress in integra-
 24

tion. The most advanced area, perhaps, is agreement on the need for more robust financial regula-
tions, and the EU has been developing rules and institutions addressing this issue over the past eigh-
teen months. However, price stability and austerity still have a stranglehold on policymakers, despite
the risks of deflation and continued high unemployment. Surely the EU is not alone, as global leaders
flirted with Keynesianism at the Group of Twenty (G20) summit in London in spring 2009, then
skittered away from a coordinated fiscal expansion in favor of more orthodoxy regardless of eco-
nomic bad news. For an elite political project that relies on some basic community agreement about
the shape of economic governance, this policy disagreement is very difficult to overcome.
A clever observer of EU history would ask, however: What about the potential for the dynamics of
crisis to resolve these problems through EU institutional innovations? Could this be the time for the
type of push for further political integration that a strongly centralized fiscal federalism would imply?
Could this be the moment when the EU moves from being a sui generis freak of history to the broad-
er political union needed as the basis for a single currency?
The history of the EU shows that crisis often—but not always—leads to increased integration.
Crisis alone will not produce results unless there is the political will and creativity to respond with
decisive innovation. From the initial establishment of the European Coal and Steel Community in
response to the challenges of postwar reconstruction to the single-market innovations of the 1980s,
examples abound of the ability of political elites to seize crisis for policy innovation. Even so, long
periods of stagnation in political, economic, social, and security arenas have persisted even in the face
of serious dysfunction. In the early years of the EU, the so-called empty chair crisis blocked move-
ment on needed decision-making reform for years. A long period of economic stagflation and hard
times in the 1970s brought little in the way of policy integration.

CONCLUSION: AT THE CROSSROADS

Today certainly represents a crisis push moment. Yet despite some limited EU capacity building, there
has been a striking lack of coordinated political leadership across the European capitals in the face of
market pressures. If anything, the zeitgeist favors political entrepreneurs whipping up anti-EU feel-
ings as austerity programs begin to bite, rather than pushing for further integration. The end of the
Cold War and the generational change in leadership from a visceral commitment to the EU as a criti-
cal bulwark against political instability mean that Germany is no longer playing its postwar role as the
engine of integration in tight embrace with France. Angela Merkel and Nicolas Sarkozy are far from
the dynamic duos of Helmut Schmidt and Valéry Giscard d’Estaing, or Helmut Kohl and François
Mitterrand, that powered many of the big bangs that formed today’s EU. Neither is the European
Commission led by an innovative policy entrepreneur like Jacques Delors, who managed to frame
the single market initiative and the euro project as imperative for EU competitiveness. Therefore, a
combination of historical contingencies, and the particular personalities involved, means that the cre-
ative and bold moves of the past will be very hard to come by.
 25

About the Authors

Katinka Barysch is deputy director of the Centre for European Reform, an independent, London-
based think tank.

Fraser Cameron is a senior adviser to the European Policy Centre in Brussels and adjunct profes-
sor at the Hertie School of Governance in Berlin.

Charles A. Kupchan is Whitney Shepardson senior fellow for transatlantic relations at CFR and a
professor of international affairs at Georgetown University. He is the author of How Enemies Become
Friends: The Sources of Stable Peace.

Kathleen R. McNamara is an associate professor of government and foreign service at George-

town University. She is author of The Currency of Ideas: Monetary Politics in the European Union and
coeditor of Making History: European Integration and Institution Change at Fifty.

Stewart M. Patrick is director of CFR’s International Institutions and Global Governance program
and is the author, coauthor, or editor of four books including, most recently, The Best Laid Plans: The
Origins of American Multilateralism and the Dawn of the Cold War.

Mary Elise Sarotte is a professor of international relations at the University of Southern California.
She is the author, most recently, of 1989: The Struggle to Create PostCold War Europe.
 26

Mission Statement of the International Institutions and Global

Governance Program

The International Institutions and Global Governance (IIGG) program at CFR aims to identify the
institutional requirements for effective multilateral cooperation in the twenty-first century. The pro-
gram is motivated by recognition that the architecture of global governance—largely reflecting the
world as it existed in 1945—has not kept pace with fundamental changes in the international system.
These shifts include the spread of transnational challenges, the rise of new powers, and the mounting
influence of nonstate actors. Existing multilateral arrangements thus provide an inadequate founda-
tion for addressing many of today’s most pressing threats and opportunities and for advancing U.S.
national and broader global interests.
Given these trends, U.S. policymakers and other interested actors require rigorous, independent
analysis of current structures of multilateral cooperation, and of the promises and pitfalls of alterna-
tive institutional arrangements. The IIGG program meets these needs by analyzing the strengths and
weaknesses of existing multilateral institutions and proposing reforms tailored to new international
circumstances.
The IIGG program fulfills its mandate by

– Engaging CFR fellows in research on improving existing and building new frameworks to address
specific global challenges—including climate change, the proliferation of weapons of mass de-
struction, transnational terrorism, and global health—and disseminating the research through
books, articles, Council Special Reports, and other outlets;
– Bringing together influential foreign policymakers, scholars, and CFR members to debate the me-
rits of international regimes and frameworks at meetings in New York, Washington, DC, and oth-
er select cities;
– Hosting roundtable series whose objectives are to inform the foreign policy community of today’s
international governance challenges and breed inventive solutions to strengthen the world’s multi-
lateral bodies; and
– Providing a state-of-the-art Web presence as a resource to the wider foreign policy community on
issues related to the future of global governance.