'Mistakes Were Made': Greek Debt Crisis Reveals Deep-Rooted Weakness of Euro Project

Greece debt crisis' effect on eurozone
A pro-EU protester holds an European Union flag during a rally calling on the government to clinch a deal with its international creditors and secure Greece's future in the Eurozone, in Athens, Greece, June 22, 2015. Alkis Konstantinidis/REUTERS

For now at least, act one of the Greek debt tragedy appears to be over, but the eurozone drama is set to run and run. The central contradiction of the currency remains unresolved: the 19 countries in the eurozone have surrendered control of their monetary policy to the European Central Bank, but they still have independent fiscal policies that control their tax and public spending. National interests, such as Germany's large trade surplus, still triumph over the common economic good.

"The euro crisis has revealed the structural deficiencies of the eurozone," says Julian Rappold, of the German Council on Foreign Relations. "Mistakes were made. Both the EU and the eurozone members have to work harder on these issues, on how to make the promise of wealth compatible with what countries and the eurozone can actually deliver."

Coverage of the Greek debt crisis has focused on Germany and Greece, but exasperation with Athens is not confined to Berlin, says Rappold. Slovakia, and the Baltic states, for example, have endured harsh times to balance their books, and there is little appetite for giving Greece an easy ride. "This is not just about Germany bullying Greece. The mood in the eurozone is that Greece is isolated, it's 18 against one. The other eurozone members are also insisting on structural reforms and cuts."

The Five Presidents' report, published on 22 June by Jean-Claude Juncker, the president of the EU Commission, and other senior officials, seeks to fix that. "The world is watching us and they want to know where we are going. Today we lay out monetary integration and bring it to its ultimate destination," says Juncker. The report proposes a series of steps, including a euro area system of Competitiveness Authorities; greater financial union; an advisory European Fiscal Board; a macro-economic stabilisation function, to deal with shocks, and the strengthening of democratic accountability.

But these measures fail to deal with today's central issue, says Mujtaba Rahman, Europe Practice Head at the Eurasia Group: the eurozone needs an institutionalised transfer mechanism to inject funds and stabilise currencies. "The eurozone common monetary policy is not fit for purpose for a large number of eurozone member states. When countries lose their monetary independence in a single currency area, you need to create some form of institution to deal with shocks to the system. This could be a debt redemption fund, a federal budget, or a common unemployment insurance system. "

At the same time, the eurozone's economic imperatives are outrunning the political will of its member governments, says Rahman. "They are still dancing around the contradictions. To move to greater fiscal integration, the Bundesbank needs to have a veto over French health expenditure, or the European parliament needs to be able to say everyone should retire at 68."

Eurozone members are not yet ready for this, says Rahman. "The lesson of Greece is that eurozone countries cannot run economic policies as if they have no implications for other eurozone members, but these ideas are not yet fully socialised at a domestic level. Politicians are still thinking in domestic terms. We need an institution that is capable of fashioning policy with the interests of the euro in mind. Without that, the currency may not be sustainable in the long term."

Others counsel caution and patience. "The job is not finished yet, that is obvious. A currency union will eventually call for a fiscal union," says a senior French official. "That is why we have been calling for fiscal co-ordination and better co-ordination of economic policies across the eurozone. A lot of steps have been taken in that direction. You can look at the glass and say it is half-empty and stress the lack of common fiscal policy. Or you can see that we have moved on a long way since the days of no bail-outs, and see that it is half-full."

The Greek crisis has helped shatter Europe's political and economic consensus of recent years, says the French official. "Of course there is still tension between national and trans-national ideas. Right-wing governments are claiming that they can control things which they cannot control. But there is a lot going for the idea that we are better off together."