Europe is pulling apart just when it needs to be coming together to cure an apparently chronic case of stagnation. The opposing forces – the calls for greater integration offset by the calls for greater autonomy, even a return to national currencies – can only push Europe deeper into the economic hole.
Intellectually and practically speaking, the argument for greater integration is compelling. A banking union, which would include common deposit insurance, would go a long way to stabilize lenders; a euro bond would drop the borrowing costs of hard-hit countries, such as Greece; a continentwide energy policy would use massive buying power to bring down costs and prevent individual countries from pursuing wildly divergent, even silly, energy programs that conspire to keep prices high.
But just when it is needed most, the integration momentum has ground to a halt and is on the verge of going into reverse. Blame Euroskepticism. Since the launch of the euro in 1999, anti-euro sentiment has never been higher.
On Monday, France's hapless President François Hollande unveiled his second cabinet reshuffle within six months. It came after economy minister Arnaud Montebourg called for the end of the Berlin-inspired austerity programs that he has blamed for pushing France to the brink of a new recession. Mr. Montebourg decried austerity as "the most extreme orthodoxy of the German right" (he lost his job in the reshuffle).
Translation: We don't need the Germans or anyone else in the EU to tell us how to fix our economy.
In Italy, the euro zone's third-largest economy, is back in recession – its third since the 2008 financial crisis. It comes as no surprise that support for the euro among Italians is plummeting. Beppe Grillo, the leader of the Five Star Movement, the second party in the Italian parliament, the Chamber of Deputies, is calling for a return to the lira as the touted recovery remains elusive and unemployment remains stuck at 12 per cent. In Italy, it has become fashionable to blame the euro for the never-ending recession and destruction of wealth.
While Spain is coming out if its deep recession, there is no unity of vision on the country's ongoing role within the EU or the euro zone. Catalonia, the relatively wealthy region in the country's northeast, is dead set on holding a Scotland-style referendum on independence in November. Spain's farmers have been burning EU flags to protest the sanctions against Russia, which triggered retaliatory sanctions by Russia against EU agricultural products. Spanish farmers were under the hopelessly naive impression that the EU was designed to broaden markets, not shrink them.
The Euroskeptic surge was put on full display in the May EU elections, when anti-euro and anti-EU parties placed first in France and Britain (Marine Le Pen's Front National and Nigel Farage's UK Independence Party) and came on strong in smaller countries, though collectively not enough to form a majority in the EU Parliament. To them, the EU and the euro zone are not working. They think the EU adds another layer of expensive and useless bureaucracy, that both the EU and the European Central Bank rob countries of sovereignty and that the supranational organizations are annoyingly meddlesome. Most of the Euroskeptic parties oppose the EU's (largely) open internal immigration policy. One party that did well in the EU election, Greece's neo-Nazi Golden Dawn, once advocated planting land mines along the borders to keep illegal immigrants out.
Fans of the EU and the common currency would be wrong to dismiss the outcome of the EU election as a political blip, a one-time protest vote that will never be repeated as the EU's fortunes improve and the jobless rate comes down. Guess what? Neither is happening. Three of the euro zone's biggest economies are in trouble. France is flat-lining. Italy is back in recession. Germany's economy contracted by 0.2 per cent in the second quarter. If Germany slumps back into recession, all bets are off for the European recovery. The only large EU economy that is expanding and adding jobs is Britain, which will cease to exist if Scotland wins the referendum on Sept. 18.
Blaming the EU and the euro for Europe's woes is a convenient half-truth. Take Italy. Since the euro came into use 15 years ago, Italy's international trade has climbed smartly. Inflation rates have come down. Ditto the cost of sovereign debt (barring the 2009-2012 crisis years, when soaring bond yields almost forced Italy to take a bailout). But there is equally no doubt Italy has been unable to recover from the crisis and that its high costs, in part thanks to the strong euro, but also due to Italy's allergic reaction to reform, are making the country disastrously uncompetitive. Youth unemployment is at a record 44 per cent and manufacturing output has plummeted 25 per cent since 2008. Those are figures normally associated with a full-blown depression, not recession. No wonder the euro is being held up as public enemy No. 1.
As long as the euro is taking some or most of the blame for the non-recovery in the heart of Europe, the integration effort – banking union and the like – is doomed. Millions of voters in some of Europe's biggest economies are saying that economic, currency and political integration, as it has happened so far, has backfired, so why keep pursuing it? Greater integration makes economic sense. It's not going to happen as long as the Euroskeptic vote remains strong. Europe is probably doomed to years of stagnation.