x Abu Dhabi, UAE Thursday 20 July 2017

The 'Super-Marios' impose a new agenda for Europe

Italy and Spain, competitors in football on Sunday, were allies last week, and very effective ones, against northern European austerity policies on the euro.

On the football pitch there could be only one winner, and Spain thrashed Italy 4-0 in the European championship final on Sunday evening in Kiev. But in Brussels, both countries had already emerged victorious, early on Friday from the EU summit talks.

The Italian prime minister, Mario Monti, and his compatriot Mario Draghi, president of the European Central Bank, were instrumental in persuading Germany's "iron chancellor" Angela Merkel to give ground.

The euro's "Super-Marios" forged a Mediterranean union with Spain and France to outflank the northern alliance led by the Germans, Dutch and Finns.

Friday's agreement to use bailout funds to buy Italian bonds (if borrowing costs exceed 7 per cent) and recapitalise ailing Spanish banks will ease pressures on the euro zone periphery and avert collapse of the common currency.

The unexpectedly detailed deal is a game-changer in that it avoids a meltdown. Euro zone leaders faced up to the looming run on certain banks and made some landmark decisions.

If the intentions are implemented (and that is admittedly a big if), the agreement will be more than a short-term fix; it will pave the way for a banking union in the next six months or so. If Germany really is committed to the survival of the euro, a banking union could be followed by a fiscal union in five years and a political union over the coming decade.

Until now, governments' approach to the debt crisis was austerity and taxpayer-funded bank bailouts. But that created a death loop between banking and sovereign debt: With banks and governments holding each other's debt, the real economy has suffered the consequences of reckless lending and irresponsible borrowing.

Austerity was meant to reduce the debt burden, but instead it killed the fragile recovery. The "double-dip" recession has raised both debt and unemployment.

Southern Europe is experiencing a social crisis unseen in peacetime since the Great Depression of 1929-32. Little wonder that voters there are embracing anti-euro populists such as the far-left Syriza party in Greece and Beppe Grillo of the Five Star Movement in Italy.

The latest agreement shifts the emphasis from austerity to growth and from national bailouts to supranational recapitalisation. The €120bn (Dh557bn) "growth pact" changes the mood. By bringing forward infrastructure spending and other public projects, the EU will help create a measure of employment. That will encourage some consumers to spend and businesses to invest.

The "growth pact" also marks the start of long-term negotiations for closer fiscal and economic cooperation, with a 10-year plan to create a euro zone Treasury with extensive powers. However, member-states will not agree to a US-style federal government that underwrites the total debt, and so markets will remain sceptical about sovereign bonds from debt-troubled countries.

Gone is the "Merkozy" power tandem in which Ms Merkel and the former French president Nicolas Sarkozy struck deals in private, locking southern countries into an iron cage of austerity. With the two "Super-Marios" at the helm, Europe now has a more collective leadership.

For now, Europe has avoided the worst. Besides bond-buying and bank recapitalisation, the euro zone countries also signed off on a surprisingly precise agreement to create a beefed-up system of banking supervision. With the ECB in charge, markets will be persuaded that this marks a first step towards a full banking union - on which a sound monetary union depends.

In exchange for these concessions, Ms Merkel did not yield on the idea of Eurobonds that would mutualise national debts. Nor did she agree to a federal "great leap forward" that would transfer national powers to Brussels overnight. Rather, those changes will be gradual. Introducing Eurobonds would require nothing less than a change of government in Germany.

In any case, a new European political settlement will require a decade or so to emerge. Much will depend on whether the "big four" - Germany, France, Italy and Spain - continue to have pro-euro governments and parliaments. With a growing disconnect between elites and the populace, it's only a matter of time before anti-euro parties take over.

Germany won't go the polls until the autumn of 2013, and the mainstream opposition Social Democrats remain committed to the single currency. The next elections in a "big four" state are in Italy, in the spring of 2013. Before that, the Dutch could vote for an anti-euro government as early as this summer.

Meanwhile, much of Friday's agreement could yet unravel, since national parliaments and electorates are increasingly resentful about deals done behind close doors in Brussels. Moreover, markets will test the new-found determination sharply.

Crucially, euro zone members need to reduce trade imbalances and productivity differentials that underpin the growing economic divergence. Unless growth and employment return, people across the southern tier and beyond will reject the common currency.

The Italian striker Mario Balotelli did not find the net against Spain. But just as the football "Super-Mario" had fired Italy past Germany in the semi-final with two sublime goals, so the political "Super-Marios" outflanked the German leader.

The euro lives to fight another day - until the next crisis hits the debt of Italy or Spain.

 

Adrian Pabst is lecturer in politics at Britain's University of Kent and visiting professor at the Institut d'Etudes Politiques de Lille in France.