Why Europe Will Emerge Stronger from the Economic Crisis

Justin Vaïsse
Justin Vaïsse Former Brookings Expert, Director, Policy Planning Staff - French Ministry of Europe and Foreign Affairs

April 14, 2009

In recent months, Europe has been singled out as a potential victim of the current economic crisis, and experts have outlined various scenarios under which the 16-member eurozone, or even the 27-member European Union, could simply break up under the pressure.

Not so fast. Far from this dire outcome, it is more likely that the downturn will force greater unity upon Europe, and that a few years from now, it will emerge stronger as a result.

Current tensions within the EU should certainly not be dismissed. As the crisis deepens, member governments are squeezed between the populist demands of their publics for protection and their commitments to the rules and disciplines of the single market and the euro. Already, there have been protests against the hiring of EU workers in Britain. The Spanish industry minister has called on his countrymen to “Buy Spanish”. France and Germany have announced big loans to their national car industries. Ireland is projecting a budget deficit of 10.75 percent of GDP for 2009, well over the 3 percent authorised by the EU’s stability and growth pact.

Add to this the “economic iron curtain” between east and west denounced by the Hungarian prime minister in March and you could be forgiven for thinking the very pillars of the European Union – the free flow of goods and workers, the respect of common rules, basic solidarity among countries – are buckling under the weight of the global financial crisis.

Given these circumstances, why should we expect Europe to even survive – let alone prosper? Quite simply because integration and interdependence have gone too far to contemplate going backwards. If deeper European integration was a smart idea in fair weather, it is now a necessity, exemplified by the help and implicit financial guarantees recently given by large countries like Germany to their weaker neighbours, including the eastern ones – for the collapse of one member state would bring ruin to all. That is the reason why “outsiders” like Iceland now want to join the EU and countries like Poland are trying to speed up their adoption of the euro.

Of course, nothing guarantees that national leaders will resist the populist temptation if the crisis gets ugly. But there exist very serious counterforces. First, the market will make mercantilist measures self-defeating, as industries will resist the conditions attached to offers of state aid, and retaliation will be feared.

Second, the very powerful common ideology among elites in favour of Europe will counterbalance the populist rhetoric, which offers no credible alternative to prevent the risk of contagion from the collapse of another country.

Lastly, European leaders will exercise peer pressure on one another, a pressure which will come on top of the fear created by mutual economic dependence.

What doesn’t kill the European Union makes it stronger. Crises have historically resulted in new steps towards integration, and already there are signs that institutions like the European Central Bank or the European Investment Bank are finding unforeseen flexibility to meet the challenge of the crisis and help states and industries in need. European leaders doubled the emergency funds available to eastern European countries in December, and doubled them again in March.They also prepared a plan to pre-empt any risk of seeing a eurozone country default on its debt, adding an implicit financial solidarity element to the famous “no bailout clause” in the rules governing the euro. Major European figures have also voiced support for issuing a joint EU bond, which could, one day, help the weakest states raise money less expensively.

At the political level, the regrettable absence of coordination of national responses to the crisis, such as car industry bailouts, has increased the pressure on the weak European Commission and the EU Council presidency to deliver, and a new leadership could arise after the European elections in June. If the Lisbon Treaty is eventually adopted – which, here again, would be largely a result of the crisis, if it persuades Irish voters of the value of the EU – it will provide new instruments to forge a united response.

In other words, the current tensions should not been seen as the first signs of a break-up of Europe, but rather as the birth pangs of “a more perfect Union”. This is why, when the downturn recedes, the EU might find itself among the winners.