Is the Eurozone Drifting Apart?

Last week brought the new ECB building's formal opening ceremony in Frankfurt. The occasion was marked by exceptionally violent protests that went way beyond what is acceptable. The strange thing is that according to the media, many of the protesters had come from the Eurozone's southern fringe to voice their anger, i.e. from countries that are some of the biggest beneficiaries of the ECB's present monetary policy. Some of them had no doubt travelled to Frankfurt with other motives in mind than simply exercising their right of free speech. Be that as it may, the protest was a clear indication that many people in Europe are turning their back on the ideas and principles on which the European Union and the single currency are built.
The ECB's present policy is no longer comprehensible to large numbers of Eurozone citizens. The trillion Euro sums that constantly figure in the media's banner headlines are bigger than most people can conceive of, while negative interest rates feel plain unnatural to many. Vague apprehension that our whole monetary and financial system could collapse is spreading and nurturing specific fears of inflation, deflation and old-age poverty. At the same time, there is growing frustration with the Greek government's questionable political tactics and the endless negotiations over Greece's future.
The ECB itself is also on the horns of a dilemma. Its formal mandate is to maintain price stability, so it follows that the logic of decision-making has to derive from threats to this objective. In actual fact however, the ECB is also having to compensate for multiple weaknesses in Europe's political system at present. Most importantly, the widespread failure of Eurozone countries to progress reform is putting the ECB under enormous pressure to act in their place. National economies vary widely in their performance, growth rates are strongly divergent, and Eurozone labor markets are heading in dramatically different directions. Germany effectively has full employment in many sectors, while unemployment remains stuck at over 10 percent in many other Euro countries. These divergences ultimately threaten the European Economic and Monetary Union's continued existence by undermining the principle of common monetary policy.
The ECB is very conscious of this danger and is accordingly making clearer and clearer calls for further national-level reform. And it is making virtually no pretense that the actual aim of the current initiatives is to speed up growth in the laggard countries rather than counter the threat of deflation.
On the other hand, the ECB's provision of liquidity to the Greek banking system is drawing it ever deeper into the political decision-making process. The ELA program's rules actually only allow it to provide liquidity to banks that qualify as solvent. A determination that the Greek banks do not meet this condition would be tantamount to a decision to let Greece go bust as a country. That is a political decision, however, that the ECB is neither permitted to take or capable of taking.
All of this illustrates just how far the ECB is having to stretch its mandate. It is self-evident that individual countries' political forces are not in a position to tackle the necessary reforms. This leaves the ECB playing the role of the last effective institution that is forced to try to make up for the failures of politicians in order to set the Eurozone on a firm foundation.
The sad consequence of this turn of events is that the Euro area's citizens are now becoming increasingly mistrustful. They are recognizing that many of the decisions that directly affect their life circumstances are no longer made by their country's politicians but by the ECB. And they know that the members of the ECB's directorate are not democratically elected and that -- for good reasons -- they are politically autonomous once in post, i.e. not answerable to any government or parliament.
People are increasingly fed up with politicians throughout the Euro area, though their concerns differ very widely from one country to another. In southern Europe but also increasingly in France, which has barely begun to address its reform program, voters are increasingly critical of the economic consequences of reforms. Parties that oppose the reform process and whose manifestos promise to prevent it, are gaining growing support in southern Europe. In countries like Germany on the other hand, the beneficiaries are parties that come out more or less clearly against further European integration. The voters' concern here is rather that further integration will involve the "donor" countries in massive transfer payments.
Differences in countries' economic structures and in the severity of the financial crisis's impact have caused their economies to diverge in recent years. The ECB's initiatives are intended to help buy the time that countries need before they can embark on structural reforms. There were signs towards the end of last year that this policy was at least beginning to pay off in many countries -- including Greece. However, progress was much slower than everyone had hoped. And in most cases the uptick had certainly not fed through yet to improve the population's financial circumstances. This caused citizens to lose patience, and more and more of them are now questioning the strategy's fundamental correctness.
These currents have polarised in recent months and now constitute undeniable political divergences that ultimately present an even bigger threat to the Eurozone's survival than the recent years' economic difficulties. The ECB has done what it can to stem the tide. Quite correctly, it has interpreted its mandate broadly: if the currency union were to collapse, it would no longer be able to fulfill its narrowly defined mandate. The ECB cannot go further than this.
It now falls to Europe's politicians to act resolutely to stop the union drifting apart. Their present approach of endless negotiations and compromise formulas risks losing the last vestige of popular support. This could trigger a disintegration process that is beyond political control and where no-one can win.

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