None of what we are facing now is new or (wholly) unexpected. Of course everyone hoped this set of problems would pass and believed that politicians would do their utmost to make matters better. But no-one ever completely discounted the possibility that Europe would fall back into crisis.
Eighteen of the nineteen Eurogroup finance ministers met Saturday night to discuss what to do about Greece. What they agreed – according to both their official statement and to the press statement released by Eurogroup president Jeroen Dijsselbloem a couple of hours later – is ‘to complement any actions the ECB will take in full independence and in line with its mandate.’ They also agreed, on behalf of ‘the institutions’, ‘to provide technical assistance to safeguard the stability of the Greek financial system.’
There is a debate right now between those who argue that the single currency can more easily survive a Greek exit from the euro than it could have in the past and those who argue that it will be a shock to the markets similar to the collapse of Lehman Brothers in September 2008. That debate will only end if the crisis abates or there is a natural experiment. The differences between the two camps are irreconcilable.
There is less discussion of what would be the longer-term impact of Greece exiting the euro. Optimists argue that the euro will emerge as a more disciplined union because member states will know that they will not be bailed out. Pessimists warn that Europe will stagger from crisis to crisis as market participants turn on weaker member states as soon as the first sign of trouble. This seems to be a stark dichotomy and yet it is not.
Europe’s heads of state and government held an emergency summit on Greece at roughly the same time that European Commission President Jean-Claude Juncker unveiled a report he drew up with support from the Presidents of the European Parliament, European Council, European Central Bank, and Eurogroup for ‘Completing Europe’s Economic and Monetary Union.’ This juxtaposition is only partly coincidental. The ‘five presidents’ have been working on their report because the ongoing crisis in Greece makes it clear to all that there are still important gaps in the architecture of the single currency. Greece is not, however, the only reason many regard further reform of European institutions for macroeconomic governance as inevitable.
Trade policy is in trouble in the United States right now primarily because it is not ‘trade policy’. Instead, U.S. President Barack Obama has framed his trade agenda around parallel agreements on regulatory cooperation that should make it easier for transnational enterprises to distribute their manufacturing processes across national borders without facing redundant regulatory requirements or losing control over intellectual property rights. This regulatory cooperation is a good idea and yet the devil is in the details. Unlike a more ‘traditional’ trade negotiation over tariff schedules and market access, both the aggregate and the distributive consequences of this type of agreement are more subtle. Worse, the language used to describe both the process of negotiation and the agreements themselves is largely impenetrable. Worst of all, these are negotiations where fundamental principles are involved.
A big unknown in the UK referendum debate is the impact this will have on the City of London as the financial capital for Europe. There are three reasons that impact could be negative. The UK referendum debate and European reform negotiations are going to lessen British influence in the design of Europe’s capital union; they are going to eliminate any incentive for Britain to sign up to Europe’s banking union; and they raise the spectre that the UK government will find itself outside of future decisions about the shape of European financial regulation (and perhaps even without the support of the European Court of Justice inside the internal market).