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The grand euro summit: extraordinary claims, some ground but lots of questions

    It all started with high drama. German Chancellor Angela Merkel declared that “No one should think that a further half century of peace and prosperity is assured. It isn’t. And that’s why I say if the euro fails, Europe will fail – and that mustn’t happen.” Aside from the fact that it is the euro itself that has led to this situation (and that the remedies to save it are likely to be unpalatable to certain national interests), it was clear that Frau Merkel was determined to use yesterday’s summit to ensure that decisive action would be taken.

    Just after 4am this morning, the leaders emerged with a three point plan to ‘solve’ the crisis. This entailed:

    • A €106bn recapitalisation of Europe’s vulnerable banks
    • A voluntary 50% write-off of Greece’s debts
    • A five-fold increase in the armoury of the European Financial Stability Facility to around €1 trillion –used for both cash injections to targeted economies and credit enhancements for sovereign bonds

    The plan was labelled “the right road” by the Chancellor George Osborne, who has recently reiterated his view that enhanced fiscal integration of Eurozone countries is the only means of its long-term existence. But though there are many questions thrown up by the plan, there seems to be a positive view that this will placate the markets.

    But the viability of the Eurozone still has short and longer-term challenges. In order to ready the southern states for further integration, Germany requires these states pursue fiscal consolidation and structural reforms to their economies which will meet with hostile objection from the populations involved. Italy seems the key here. Over the past few days Berlusconi has struggled to find support for the economic reforms necessary, and all eyes will be on the effectiveness of the issuance of Italian debt today.

    In the medium -term, fiscal integration will be a more significant hurdle – both to the Eurozone countries and the wider EU. First, how does one get there? Unless southern states like Greece undergo economic miracles in competitiveness, then there will have to be an acceptance by countries like Germany that they will have to engage in significant fiscal transfers. And even if these political pressures are overcome, the EU will still have to face the potential conflicts of interest between an integrated euro area and a wider EU community who seek policy area repatriations.

    And then there’s the long-term problem. What happens when there is a large localised economic shock, which would currently require a national policy response by a national government?  In essence, how can the centralised Eurozone finance ministry meet local democratic demands with accountability to Greek, or Italian, electors?  This is a big problem. As John Redwood thoughtfully laid out in his critique of the EU’s current problems during the referendum debate, the democratic process as we know it relies upon populations holding their governments to account for their policy decisions. All the time that nations continue to exist, with collective interests, the further fiscal integration will mean an erosion of this democratic link, which will not be overcome until there is a European demos.

    There is therefore a tension between the economics of currency survival and the reality of democratic accountability – which threatens much deeper, but no less significant, future difficulties.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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