The leaders of the EU know they are skating on thin ice. The eurozone is mired in a deep and prolonged economic stagnation that has caused the worse mass unemployment in the periphery of Europe since the Depression. Of the big economic member states only Germany is doing remotely well (if you consider a growth rate of 1-2% doing well) as the current currency system ensures German manufacturers can continue to export at a discount rate all over the world. The eurozone banking system is in a very fragile state and systemically important parts of it will need to be recapitalised (i.e pumped full of public money) to prevent a disastrous financial crisis. Numerous eurozone countries, including big nations like France, Spain and Italy, are persistently breaking the eurozone fiscal rules on government deficits. The migrant flows into Europe are quite likely to accelerate if Aleppo falls and Assad wins, and the Turkish turn towards authoritarianism intensifies. Across the EU radical populist parties of the left and the right are growing in support, and many of them want a radical rethink of the entire European project. Some even want to dismantle it. The entire European project seems now to be stuck in an impossible place, where it cannot go back to a pre-Euro federation, and it cannot move forwards to a new pan-European democratic polity, so none of its deep structural defects can be rectified. And Brexit, which if mismanaged could easily deliver an economic blow to the weakened europzone economy, has shown there is an exit door.
So things are little fragile. Perhaps its time for some pragmatism from the Ordoliberals in Berlin. And that’s what we seemed to have got in the last week when the German government decided not to push the European Commission to impose a punitive fine on Portugal and Spain for their persistent failure to comply with their budget deficit targets, leading one Eurogroup minister to declare that the euro zone’s Stability Pact is “dead.”
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