Europe’s Imperiled Institutions


29th May 2012

The euro zone crisis has spared few pillars of the nearly 60-year-old European project. The chasm between elite purpose and popular support is widening by the day, with little to suggest that political support for austerity without growth can be sustained for much longer.

It is one matter, however, for one set of political leaders — such as those in Spain, France and Italy — to be punished for the failure to manage effectively the aftermath of the financial crisis. It is quite another, for the institutions of Europe — including the European Central Bank — to face a crisis of confidence and legitimacy that threatens their very existence.

In Greece, the polls have moved again, raising a fresh round of questions about whether the Greek electorate remains committed enough to Europe to return a pro-austerity coalition when they vote on June 17. By contrast, the Irish referendum seems more secure. Irish voters have no love for their government and little enthusiasm for austerity, but they seem to accept that it is better to go along with Europe than to go it alone.

These two illustrations tell us a lot about the political economy of the crisis in Europe — about the Europe that still attracts and the Europe that is sinking under the weight of the current crisis.

Neither the Greeks nor the Irish place much credibility in the notion that austerity will lead to growth. The evidence to the contrary is all around them. Nor do the Greeks and the Irish have much confidence in their politicians. The Greek voters repudiated the two parties that shared power for decades, Pasok and New Democracy, in the May 6 elections; the Irish voters did much the same to Fianna Fail 15 months earlier.

Rather, the decisive factor in both countries is the perceived legitimacy of the European Union. This pattern is not unique to Greece and Ireland. Across Europe, evidence is emerging of voters moving from questions of credibility and confidence to legitimacy of the existing institutions. In some cases the end result is pro-European and in others it is not.

The British, Czech and Polish governments are all burnishing their reputations for euro skepticism. Their ideas are no more credible and their political leaders no more beloved; it is just that it seems right to the voters that they should strike a more independent tone.

Recognizing this pattern is important because it highlights what might happen if perceptions of legitimacy were to change in light of events. The result would be a fundamental change in institutions that would make Europe a very different place. Hungary is a good example of this dynamic. The austerity measures introduced by Lajos Bokros in the mid-1990s did much to turn around the economy, but never gained much credibility with the electorate. When Ferenc Gyurcsany reintroduced the same principles in the mid-2000s, he admitted to the party faithful that he had to lie to the voters.

Now Hungary has reaped the whirlwind with a Fidesz government that not only rejected Bokros-style austerity when it first came to power in the late 1990s but also set about fundamentally changing the country’s Constitution when it came back into power in 2010.

The European Union does not have a constitution, but it does have important institutions whose legitimacy is imperiled. Chief among them is The European Central Bank. This institution has done more than any other at the European level to engineer an effective response to the financial crisis. Nevertheless, the credibility of its mandate to give priority to price stability is now openly questioned and popular confidence in the E.C.B. is at historic lows.

The only two things that stand between the central bank and a sweeping reform are a lingering faith among European economists in the bank’s political independence and a much more widespread concern that no major German political institution — the Parliament, the central bank, the constitutional court or public opinion — would ever tolerate a change in the European Central Bank’s mandate.

This is why the latest intervention by Thilo Sarrazin is so important. A former German central banker and finance minister, Mr. Sarrazin is well aware that the credibility of the E.C.B.’s policy framework is under challenge. He has played his own part in undermining popular confidence in the political leadership as well. Now he is openly challenging the legitimacy of German participation in the euro. He does not even need to win the argument to make a difference. All he needs to do is point the way where populist politicians like Geert Wilders in the Netherlands had hoped to go — and the challenge to Europe’s core institutions will become far more serious in nature.

The elections in Greece — and even sooner, the referendum in Ireland on Thursday — may ultimately pull Europe back from the brink of the crisis. But unless Europe’s politicians can shore up the credibility of their policies and the confidence of the voters, there is ultimately only one way this can go. A real crisis of legitimacy for Europe’s institutions threatens to emerge, and with it a political task far greater and more onerous than the one facing its leaders today.


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Nader Mousavizadeh and David Claydon founded Macro Advisory Partners in 2013 to provide a global client base with a competitive advantage in a complex world. Driven by a belief in the value of independent, long-term strategic counsel, MAP's co-founders created a firm that delivers actionable macro strategies to decision-makers in business, finance and government.

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    Jurist in Residence, Borden Ladner Gervais LLP
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    President, Carnegie Endowment
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    Co-portfolio Manager, Lone Pine Capital
    Mala Gaonkar is Co-portfolio Manager at Lone Pine Capital, and a former consultant at the World Bank.
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    Executive Chairman, Brookings India
    Vikram Mehta is a leading Indian businessman who was Chairman of the Shell Group of Companies in India.
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    President, IRC
    David Miliband is President and CEO of the International Rescue Committee, following a distinguished political career in the United Kingdom.
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    Dean, SAIS
    Dr Vali Nasr is Dean of the Paul H. Nitze School of Advanced International Studies of Johns Hopkins University.
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    Director, Inter Mediate
    Jonathan is Director of Inter Mediate.
  • Carl-Henric Svanberg

    Chairman, BP
    Carl-Henric Svanberg is Chairman of BP Plc.


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