Illustration: Peter C. Espina/GT
Europe is dabbling in troubled waters. The global financial crisis that initially hit Wall Street took a bigger toll on Europe than on the US. While the US economy is already on track to recover, Europe's is still struggling to deal with the debt crisis. Misfortune never comes singly. Over the past year, Europe has gone through a lot of suffering - the refugee crisis, terrorist attacks, the emergence of separatist forces and the rise of populist political parties. The UK surprisingly voted to leave the EU in June, and an Italian constitution referendum failed in early December. A rising number of people in Germany and France - two core EU economies - also have doubts over the union.
Inevitably amid these problems, people start to ask what is wrong in Europe, an area that has long posed as a global leader in regional integration, climate change and development assistance. If this rumbles on, will the EU still exist? And is a disintegrating EU probable?
Answering those questions requires clarification of the causes of the varied chaos in Europe and whether they have shaken the foundations of the EU.
Subprime bonds created from the securitization of individual home loans in the US were a major trigger of the 2008 global financial crisis. Those falling victim to the crisis were mainly borrowers who couldn't afford to pay off the debt, mortgage lenders and financial institutions, particularly investment banks, that invented the derivatives.
By comparison, Europe was mired in a sovereign debt crisis in which government debt burdens exceeded their bearable limits so as to result in the risk of debt defaults. Governments issue debt to fund social welfare spending and infrastructure projects as well as to support small and medium-sized businesses. Since its launch, the euro has been known for its high creditworthiness and steady appreciation, enabling countries in the eurozone to issue euro-denominated debt at a very low cost. A multitude of government debt was therefore issued, and countries whose economic fundamentals were underperforming turned out to be heavily reliant on government debt. However, the expenditures to finance the bonds were issued for social welfare outlays or funds allocated to infrastructure or preferential loans offered to small and medium-sized enterprises which could barely generate direct economic benefits or only yield low returns.
These debts could only be balanced if the economies were well developed and consequently could generate enough taxes. It wasn't a problem when the economic situation was good, as old debts could be replaced by issuing new debt. But when the US subprime crisis spread through Europe, the interest on the European sovereign debt soared, pushing up the cost of new debt. Still, it seemed difficult to cut down on the various expenditures, and some countries inside the eurozone approached their limit to repay the interest and principle on their loans. They had no choice but to default on the loans, unless they could secure special bailouts. Portugal, Italy, Ireland, Greece and Spain were economically weaker, and thus were among the first to take a hit in the debt crisis.
A common-sense prescription to pull Europe out of the debt crisis was increase income and cut spending. French and German governments were divided on which was more urgent before German government's advocacy for fiscal stringency was agreed on. After all, the economically weaker eurozone countries couldn't find a better option factoring in the poor global economic fundamentals. Naturally social welfare outlay topped the list of spending cuts.
The reason behind heavily indebted European countries was due to the far greater role their governments had played in adjusting income distribution and economic activities than that of the US. Also globalization led to the hollowing out of European industries and over reliance on services, which rendered those countries helpless to pay back loans.
In addition, global allocation of industrial chains rendered people in manufacturing, agriculture or mining jobless and induced dissatisfaction from countries that offered rescue to others. The sudden influx of refugees and frequent terrorism attacks jointly pushed the rise of populist and right-wing forces.
But we need to note that the EU's comparative advantage lies in its sectors of services, finance, high-tech and advanced manufacturing, which only gain strength being more globalized. And traditional manufacturing is unlikely to shift back given limited profit margins.
In addition, the contradiction of a united currency without a fiscal union has left Europe unable to come up with forceful fiscal policy that corresponds to monetary policy. But still, replacing a nation's own currency with the euro is considered much easier than withdrawing from the euro currency union to restore own domestic currency.
Although forces of xenophobia further developed in Germany and France, they have not become the political mainstream, and the countries' faith in European integration has remained unchanged. While issues brought by immigration would make people reflect on the negative impact from diversified cultures, the overall attitude toward cultural diversification is positive. The EU is unlikely to fall apart as long as France and Germany are determined to keep their faith.
Last, the UK's decision will have limited effect on European integration. As per the UK's experience, exit is difficult and costly. Further, other countries still hope to join the EU.
In this respect, the foundation of European integration is not shaken, but these chaotic incidents and setbacks have provided an opportunity for all sides to renegotiate and balance interests.
The author is director of the Department of International Strategy at the Institute of World Economics and Politics, Chinese Academy of Social Sciences. firstname.lastname@example.org