Europe staring into the abyss

“If the Euro fails, Europe fails“.

The heady optimism that accompanied the birth of the Euro has given way to legitimate fears of its imminent demise – an unprecedented event with ramifications that have the potential to upend the existing socio-political order in Europe and beyond.

That the Eurozone is imperilled due to a combination of financial irresponsibility by member states, lack of political cohesion, and inherent flaws in its original design is by now a given. But the question remains what exactly happens if it does fail? If the Euro’s failure would mean the failure of Europe itself, what would the tangible implications of this be? What does it mean when a continent fails?
 
Europeans as well as the rest of the world should hope such a scenario can be averted. There are several potential outcomes depending on what form such a failure takes but none of them offer a safe and easy exit; and indeed many of them would be positively apocalyptic for the global economy.

In a recent report for The Centre for Strategic and International Studies, Thomas Wright identifies two potential scenarios for European failure. The first is one in which the Eurozone countries continue using a shared currency that has “failed” in the sense that it is barely functional but from which there is no feasible escape; and another where the Euro itself experiences a disorderly collapse due to either political forces or an economic shock that cannot be effectively managed by member states.

The former scenario would likely create a permanently weakened Europe, perpetually oscillating between financial crises and costly bailouts while stifling both its political clout and economic growth for the indefinite future. The latter scenario, a wholesale collapse of the Euro, would be positively apocalyptic not just for Europeans but for the global economy as well – and that this scenario is a possibility makes it that much more alarming. The demise of the Euro as a shared currency, potentially triggered by the exit of a member state as nearly happened (and may still happen) very recently in Greece would result in potential economic catastrophe on a scale not seen since the Great Depression.

Further forecasts of a Euro-collapse scenario by ING predict a 9 per cent GDP drop across the Eurozone in the first year alone, while UBS predicts that weaker countries within Europe could see reductions in GDP of 40 to 50 per cent. Double digit inflation and unemployment would be nearly assured, and countries would likely adopt highly protectionist economic policies in order to contain the contagion effects of the collapse.

Those states formerly using the Euro would find themselves forced into reverting back to national currencies, a situation which would undoubtedly result in even greater inflationary pressure as the “new” national currency would have little public confidence and would command a greatly devalued purchasing power in comparison to the departed Euro. Again, peripheral countries would fare worse, and those with weak national currencies would find themselves in a position of immediate bankruptcy as their debts would be denominated in the currencies of their creditor states. The fact that the countries on the periphery are the ones with the largest debts only compounds the problem, and the inevitable default that would follow would cause major financial losses to their creditors as well.

Europe would find itself suddenly and violently jarred from its post-WW2 programme of greater political and economic integration back into being a continent of walls and hard borders. Protectionist, isolationist policies would be the order of the day as each country attempts to insulate themselves as much as possible from the massive financial contagion of the collapse – though large-scale economic retraction would inevitably still occur to varying degrees no matter what measures former member states took. The entire project which saw a united Europe as its goal would come to an abrupt end, and at great immediate and long-term cost.

Echoes of the past
 
No less a figure than International Monetary Fund Chief Christine Lagarde has said that the collapse of the Euro would lead to a “1930s moment” in Europe. The allusion is to the crushing economic depression and protectionism of that period, but those forces also acted as the incubators for the xenophobic nationalism and authoritarianism that tore the continent apart over the subsequent decade. The entire liberal foundation upon which post-WW2 Europe was created was intended as a radical response to this destruction, and the integration of the European community was intended to remove the possibility that such forces could be unleashed again.

However it seems that given the excruciating economic turmoil in many countries such a scenario of rising extremist may once again become possible. To paraphrase Friedrich Nietzsche, who was well acquainted with the subject: As Europe has begun to stare into the abyss, the abyss has begun to stare back into it as well.
 
Today European liberal ideals are being challenged by popular parties from both the far-left and the far-right whose appeal was thought to be dead and buried: the ghosts of a European past fraught with bloodshed and authoritarianism. Ultra-nationalist parties whose platforms and rhetoric are virulently xenophobic, anti-Semitic and Islamophobic have made deep inroads into European political life, far from the fringes where they have been confined by popular sentiment for decades.

In Greece, one of the hardest hit Eurozone countries where official unemployment figures is above 20 per cent, the seemingly neo-Nazi party “Golden Dawn” for the first time ever won a significant foothold in national elections. In France, the Netherlands, Hungary and many other countries parties espousing openly bigoted and extremist views are polling well and achieving rising success in elections. Marine Le Pen’s French National Front advocates virulently ultra-nationalist, anti-European policies and has blamed immigrants for the “destruction of French identity”, a platform upon which her party won millions of votes and came a close third in recent elections.
 
Economic deprivation and humiliation in the form of crushing austerity policies have manifested themselves into broad popular anger – anger which has increasingly found violent expression in attacks on immigrants and minorities across Europe. Extremist views have in many places become normalised and acceptable. While Europe’s painful collective history provides some buffer against such forces coming to power, their rising popularity amid the economic stagnation of the past years suggests that in a total-collapse scenario they may be well poised to step out of the shadows and return to prominence once more.
 
Stepping back from the brink

Faced with two extremely unpleasant scenarios regarding the failure of the Eurozone – either the collapse of the currency outright or a situation where it “fails” but remains in use and continues to produce economic crises while stifling growth – it has become clear that the only way forward to a sustainable and successful Europe is to pursue more sound integration. The origins of the crisis itself were due to the fact that within the Eurozone countries had shared monetary policies without shared fiscal policies: countries could borrow and spend at greatly reduced cost on the new currency with impunity because their fiscal policy was theirs alone. Once the financial crisis struck the full magnitude of the problem became evident, as massive sovereign debt crises occurred within heavily indebted member states and the contagion began to spread throughout the Eurozone.

Stronger European states will not accept fiscal integration without greater political integration as well, as German Chancellor Angela Merkel has made clear. Creating a “United States of Europe” with Germany at its lead seems to be the only way forward, yet popular sentiment is naturally aligned against it. EU countries are loathe to give up political and fiscal autonomy, especially if it would make them effectively German subordinates, but faced with the alternative not many choices seem left.

Is the wholesale failure of the continent, likely triggering a new Great Depression and the resurgence of fascism or other forms of authoritarianism a better option? Is suboptimal continental success not better than outright failure? The stakes are high not just for Europe but the entire world. A failed Europe would derail the United States’ fragile economic recovery and would devastate the economic growth of China and much of the Middle East. The possibility for social and political upheaval in many of these countries would become very real in the event of a European collapse, the threat being especially acute for countries with economies closely tied to Europe’s and those with nascent political systems vulnerable to external shocks.

A failed Europe has the potential to cause the rest of the world to fail as well, and at the very least would likely result in a “lost generation”, characterised by unemployment and low growth across the board. The potential for this disaster is very real and as Europe stands on the precipice the rest of the world needs to exert whatever influence it can to see that Europe does not indeed falter as it did during the 1930s. History has shown that the costs of such a failure are too steep to bear.

Murtaza Hussain is a Toronto-based writer and analyst, his work has appeared at Salon.com. He has recently completed his MBA at Queen’s University, Toronto.