Europe is not doing itself a service. Pessimism is driving the European economies into a recession. And with economic growth coming to a halt, so will government revenues. Hence it will be even more difficult to reduce government debts. A negative spiral that fuels uncertainty, unhelpful divisions and populist responses. None of these features helps to overcome the crises and to stop the downward economic trend and what that may trigger.

The Euro crises itself maybe useful in that it reveals under its pressure the weaknesses of the Euro and European Union construct.  In the decade of relative economic boom until the financial system imploded with the collapse of Lehman Brothers in 2008, hard political choices were avoided.  The conventional thinking was that high levels of government debt would be redressed through economic growth and increased government revenues.  But with the financial crises of 2008 and the need for governments to recue the banks with huge amounts of money and guarantees, government debts further increased to unsustainable levels with economic growth faltering.

Where government bonds were until recently considered the safest investments, because governments could not go broke and were able to sustain relatively high levels of debt without attracting financial speculation, this does not apply any longer for the 17 countries within the Euro zone.  The simple reason is that with the introduction of the Euro, the national central banks lost their possibility to print Euro’s to regulate the money supply.

That mandate has been given to the European Central Bank  (ECB).  The ECB, however, has the limited mandate to guarantee price stability but not monetary stability.   Simply put (and reality is obviously more complex) if the ECB would be given the mandate to guarantee monetary stability of the Euro, and when necessary use the capacity for ‘quantitative easing’ by buying up government bonds of Euro zone countries, it would return the stability to the financial markets overnight and put a much needed break on the downward spiral.

Comparison with US, UK and Japan economies is illuminative.  The Euro zone economy has the best indicators. Compare the following statistics for example.  Budget deficit Euro zone in 2011 4,3%, US 10.0%, UK 8.6% and Japan 9.7%.  Sovereign debt Euro zone 87,6%, US 101,0%, UK 83,6% and Japan 180,4%.  Current account Euro zone -0,4%, US -3,2%, UK-2,5% and Japan 3,6%.  Interests government bonds Euro zone (10-year period) 4,16%, US 2,12%, UK 2,41% and Japan 0,98%.[1]   If the economic indicators for the Euro zone are better, and even substantial better on some indicators, why are the financial markets punishing the Euro zone with such high interests rates?   Why for example not the US economy of which its sovereign debt was recently downgraded from its AAA+ status?

In essence, the answer lies in the difference in mandate between the US Federal Reserve Bank and the ECB.  To go forward, the EU should upgrade the ECB mandate (or alternatively, the forthcoming European Stability Mechanism, ESM) to conform with the US Federal Reserve Bank mandate.   It would create the firepower to withstand on the strength of the Euro zone economic cloud any potential speculation by the huge amounts of money that flow through the digital global financial system.   It implies that Euro countries should in future not continue borrowing individually.  That shall put the Euro at long last at a firm footing.

Yes, it will come at a price.  The price of rising borrowing interest in the northern Euro zone countries, but most likely not above the interest the US is paying and probably less on the strength of the economic indicators.  It will offer the southern Euro zone countries a real possibility to overcome their economic troubles, rather than being pushed back in recession through the harsh austerity packages, and to make economic investment and much needed growth feasible again.

It is unfortunate that much of the public debate among politicians, journalists and economists is directed at the difficulties of the so-called PIGS countries and in particular at Greece and Italy.  Indeed, their economies and systems of governance face serious problems that need to be addressed.  But the self-righteous nature of much of the whipped up sentiments in Europe against southern Europe, distracts from addressing the missing links in the European construct, the needed economic and political union.  Given the strength of the European economy in relation to other economies, the Euro crises is a system default that needs to be fixed.  The longer it takes, the more difficult it becomes to resolve because of the divisive sentiments whipped up in policy and media circles.

The crises unfolds at a moment in history that the power relations in the world are shifting and new balances emerge.  The uni-polar world is quickly changing into a multi-polar world with clearly defined economic powers such as the US, China, Japan, Brazil, India and one would believe Europe.  There is no time to waste for Europe to assert itself as one of the partners around the table.  For that a stable Euro is required.  Without the Euro there will be no Europe, to quote Angela Merkel.  She is right.  Yet, she is in the unenviable position to convince her German electorate that the only way to rescue the Euro is to turn the EU into a real economic and political union and adapt the mandate of the ECB.  The latter is something to which the German DNA will not easily accommodate.  But unusual times make adaption to change possible.

In parallel, the crises also compels the Euro zone countries to reform and modernize their economies while preserving the basic tenants of the European social-market model or, as it is also referred to, the Rhineland model.  Again, there is no time to waste to restore confidence in the European project and to create the political space for the European  leadership to take their electorate along the path of completion where the previous generation European leaders left it unfinished.

The outcome of the Euro Summit in Brussels on October 26th, 2011, received mixed reviews.  The dominating line was however, consistent in the current negative climate, that it was ‘too little too late’ to address the crises effectively.  And yes, the Greek Prime Minister with his unilateral decision to call for a referendum, proved the skeptics right.  You can not manage the Euro with a leadership behaving as 17 frogs in a wheelbarrow.  And yes, the decisions are one step in the process of addressing the underlying defaults but not the finish line.  Commentators appear to overlook the trend set in motion by the EU decision-making, a trend which in my opinion is positive and ought to be welcomed with self-confidence and optimism.  I rather see the glass half full than half empty.

The Euro Summit was preceded by an important decision of the European Parliament to adopt the so-called Six-Pack policies.  These are new binding regulations for Euro zone countries to submit their budgets to the European Commission for review ahead of presenting it to their national parliaments for decision-making.  The Euro Summit also decided that all Euro zone countries will entrench the requirement to balance their budgets in their constitutions or other statute books by 2012  in this way preventing future budget deficits.  The European Commission will be given enhanced powers to enforce these regulations.

Solving the Greek debt crises and it contagion within the European banking system, dominates the news.   But as important is a range of decisions to strengthen the role of the European Commission and the oversight function of the European Parliament, to discipline economic management of the Euro zone countries.   Meanwhile, the ECB has started to buy bonds of Euro zone countries in financial difficulty, thereby stretching its formal mandate.  A contested practice, certainly in Berlin, but forced by circumstances and pointing the way.  Like it or not, that is Euro economic union in the making.  That is the way forward.

The question is how this process can democratically move forward?  The nature of intergovernmental cooperation requires negotiations and compromise.   Given the huge interests at stake, these negotiations find place in a rather transparent fashion, with journalists and camera’s at every meeting door.   It is a decision-making process that in a democratic setting takes time, by necessity.

The problem is that time is in short supply in today’s world.  Where decision-making in the financial markets takes place in split-seconds, fully nontransparent,  political decision-making follows a slow step-by-step approach.   How to bridge this time gap?    Who is driving who; are the financial markets driving the politicians as it appears to be the case or the politicians setting the terms within which financial markets for the benefit of the common good?

The European electorate is uncertain, losing confidence in the political elite to create  stability for its currency and is inclined to retreat to the certainties of the past.   Overwhelmed by news reports about doom scenario’s, and contradictory messages of EU leaders and economic analysts, one understands this primary response.  But we need to keep our eyes on the ball and not yield to the European inclination for self-defeating pessimism.  The crises is as much a crises of the financial system, of the gaps in the European construct, as well as of the European psyche.

After all, Greece forms a tiny part of the Euro zone economy, not more than 2,5%.  Yet, the continued problems it causes for the Euro zone as a whole, demonstrate how the financial sector has become interconnected and interdependent.   The interbank loan system has come to full stop once again, as it did at the height of the sub-prime crises in the US in 2008.  Sovereignty in managing the economy has in many respects become illusionary.  Europe better wakes up to this reality and accelerates the formation of an economic and political union.  Like it or not, it is the only way to respond more decisively and convincingly at the changing global economic and financial realities.

Only if Europe maintains or, if you want regains, its credibility at the G20 table of old and emerging economies, can Europe’s voice influence the challenges of our time:  the consolidation of democracy, the deepening of  the international system of rule of law, the transformation of the global financial system, the management of the earth resources on a sustainable basis for an increasing world population, and the needed investment in reaching the Millennium Development Goals.