In his current policy memo for the European Council on Foreign Relations, titled Why the Euro Crisis Threatens the European Single Market, Sebastian Dullien thinks through several possible outcomes of the Euro crisis and their respective impact on the Single Market.
The picture he paints should be considered by all those in the “richer” European countries who cling to the populist notion of “solving” the Eurocrisis by simply throwing all the weaker economies out of the Eurozone.
He makes a convincing argument about the often-neglected interconnectedness of the European Monetary Union and the Single Market, as he presents the three options he thinks realistic for the future of the Eurozone. In (very) short form, the options are as follows:
A complete Euro break-up would completely shatter the single market, as member states reimbursed with power over a new national currency would resort to completely nationally oriented methods of consolidating their finances, while damaging the single market. The Commission couldn’t do much to keep them in line, as a country that has left the Euro has either already left the Union, or is in violation of European law reintroducing their own currency. This would increasingly diminish the European instutions’ legitimacy and at the same time also produce negative spin-offs for the Schengen area, as the large stream of migrants from crisis countries is being stopped by nationalist political forces, who were strengthened in the process.
For a “muddling-through”-approach, which is what he considers most current attempts at solving the crisis, he predicts a “more shallow” single market, as he sees it as disintegrating the banking- and finance sector. Distinctions in finance along national borders also means nationally oriented financing of businesses, which distorts the market by punishing or rewarding companies for their location. This would also prompt migration to the better-off countries, albeit not as badly as in the first scenario, prompting the same negative side-effects for the Schengen area.
As a third approach, Prof. Dullien presents a deeper integration, a step toward true federalism, including EU-level financial and economic oversight, maybe including a Financial Transaction Tax. This, he says, would solve many of the current problems of participating countries. However, this comes at the price of splitting the market for financial services along currency lines, as countries like the United Kingdom opt-out, and would possibly even prompt a recalculation of their benefits from the EU, resulting in an exit of the UK. Thus, this scenario would keep the single market, even integrate it further, but only do so for a smaller single market.
Prof. Dullien makes convincing arguments and definitely clarifies the gravity and complexity of the situation as it is, far beyond simplistic and populist paroles of “let’s throw the PIIGS out, and we’ll be fine!”.
However, there might be a perspective to the smaller single market, his third option, which might not make it seem quite so small. As a recent New York Times comment by Steven Erlanger elaborated, there is currently a tendency of European regions to aspire secession from their national entities. Of particular interest is the fact, that the UK, which, as Prof. Dullien also notes, the member state most likely opposed to fiscal integration, is among those with such a region: In Scotland, for example, there has been a tendency to favour being part of Europe over being part of the UK. Mr. Erlanger points out in his comment, that the Scottish National Party’s slogan still is “Scotland in Europe”, even though they are coming to regret it amidst rising anti-european opinions.
Rising regional influences aside, even David Cameron’s government seems to be moving away from preparing a referendum on the EU in terms of in-or-out, as they contemplate how to keep EU membership, but make fiscal union another part of the two-speed Europe. Consequently, I believe that the last word on the United Kingdom as a whole within the EU and the coming changes to EU structures may not yet have been spoken in this matter.
Read Sebastian Dullien’s paper to learn about possible consequences of the Eurocrisis for the Single Market – Even though I don’t see the UK’s reaction in his third scenario as clear-cut as he does.