Despite the Europeans? immediate and rapid response last weekend to boost efforts to tackle the crisis in the Spanish banking sector, the case of Spain has undoubtedly illustrated to all that the current crisis spillover in the eurozone is mostly the result of a poorly integrated currency union rather than the unwise fiscal policy its member states have pursued in recent years.
Since the emergence of the crisis two years ago, Europe?s leaders have become entrenched in a superficial interpretation of the reasons behind it and, as a result, the measures they have agreed to and enforced in a bid to eliminate the problem seem a very short-term response to a long-term issue. As a result, the actions undertaken by European institutions have not proved as effective or as sufficient as was expected when they were so warmly heralded.
The faulty diagnosis of the eurozone?s problem resulted not only from a lack of leadership, but also from the inability of European institutions to come up with and implement a long-term strategy to contain the crisis?s deepening threat of contagion. Referring to the recent 100-billion-euro rescue package for Spain?s banking sector, prominent Nobel Prize-winning economist Joseph Stiglitz uttered an ominous truth: The country is being sucked into a vicious downward spiral as the money borrowed to be injected into the banks will burden the national sovereign debt and drastically increase the likelihood of Spain becoming insolvent by cutting off its access to the markets.
You don?t need a PhD in economics to understand that this multifaceted crisis — which emerged in different ways in Greece, Ireland, Portugal and Spain, and will likely do so in the very near future in Cyprus and Italy and who knows where next — demands that Europeans take steps toward the reinstitutionalization of the functional mechanisms within the common currency union. Recently, European Commission President Jose Manuel Barroso stressed what the International Monetary Fund, the US Treasury Department and many reliable economists have highlighted, arguing that Germany is pushing Europe to take a leap greater than that which the crisis is taking. Taking steps toward forming a common banking union in the euro area that would have a supervisory role over the European banking sector could be the only way to break the vicious cycle of a state that becomes insolvent bringing down its banking system, or vice versa.
Of course, such moves — as a part of the necessary reinstitutionalization of the euro area — require a broader vision not only of where Europe is headed but also of how the eurozone?s member states can work together in a framework of consistency, solidarity and deeper integration. Even if this were the intention of the Europeans, and of Germany in particular, putting such a plan into action requires time, which is in short supply right now. Much of the past two years, for example, has been wasted by Europeans demolishing the eurozone?s social, political and economic cohesion rather than constructing institutional firewalls to protect the common currency.
At this crucial time, as the financial crisis is expanding across the continent, the solution will not come just by lending money to countries from the European Financial Stability Facility (EFSF), European Stability Mechanism (ESM) and the International Monetary Fund under conditional bailouts, increasing national sovereign debts and burdening taxpayers with billions of euros destined mostly for banks rather than growth-boosting investments. With Cyprus and Italy next in line in the eurozone?s steady dismantlement, European leaders along with the ECB and the IMF should delineate what Christine Lagarde highlighted recently as a ?master plan? and ?collective determination? to rescue the common currency. Such a master plan should be an institutional relaunch of the eurozone by going ahead with the necessary fiscal, financial and banking federalization of Europe.
The eurozone has been trying to tackle this crisis by using only fiscal adjustment tools and neglecting the importance of adjusting its institutional functions in three key fields: the supervision that the uncontrolled markets should get from an authorized independent European institution (which does not exist now), the unification of member states? access to the markets by enacting Eurobonds, and the disengagement of member states? sovereign debt problems from the private banking sector?s bailout packages, as taxpayers have no part in bankers? mismanagement and no reason to pay for their irresponsible practices.
Throwing more and more money into the same bottomless barrel without trying to fill the existing holes will make markets increasingly nervous and push the eurozone?s story closer to an end. Since this eurozone crisis is not just a fiscal one but structural too, there is no other way for Europe to implement the reforms needed to reinvigorate the common currency and give the bloc a reason to keep existing. Paraphrasing US President Bill Clinton?s popular adage ?It?s the economy, stupid,? as far as the eurozone crisis is concerned, it?s all about institutional reforms, and there is no time to waste anymore. If these reforms do not take place as soon as possible, creating a new concept of the common currency area, within which member states coexist in the same fiscal and financial federation, the vision of complete European integration will start putrefying along with the gradual decay of the euro.
* Thanos Dimadis, a specialist in European policy, is a correspondent based in the USA for Skai TV