Europe’s fate: hive out, break up or blend in

The collapse of the euro was not inevitable, IISS Council Chairman Professor François Heisbourg said during a recent speech at the IISS-US. However, it would require effort, wisdom and luck to rescue it. In a presentation on the prospective collapse of the euro and its strategic consequences, Professor Heisbourg suggested three possible resolutions to the euro crisis: ‘hiving out’, ‘breaking up’ or ‘blending in’.

In a ‘hiving-out’ strategy, Greece would be removed from the euro and treated as the IMF treats faltering countries in Asia or Latin America. Banks had already sustained losses on Greece, Heisbourg said, and it was possible the euro would still be able to cope after Greece’s withdrawal. In this scenario, the euro’s future would be dependent on markets and stability mechanisms.

If the euro survived Greece’s departure, ‘breaking up’ could still happen, Heisbourg argued, if:

  • the European Central Bank were unable to extend further its long-term refinancing operations;
  • the European Financial Stability Facility and the European Stability Mechanism were not fully combined into a single ‘firewall’, and the euro nations did not create Eurobonds to help finance struggling countries’ debt;
  • a European fiscal treaty were ratified but without a growth plan, triggering a deeper recession, or no treaty were passed, reducing market confidence in the euro;
  • growth slowed in China;
  • the US government implemented sequestration (‘automatic’ spending cuts caused by the inability to reach a budget agreement).

Finally, the euro could be saved through a ‘blending in’ strategy. For this effort to be successful, Europe would need a fiscal pact complemented by a growth plan; the good economic luck of expanding economies in the US and China; and a mechanism – such as a transfer union – to manage the different economies of the eurozone.

Heisbourg discussed the strategic implications of these scenarios. If the euro collapsed it was possible that the EU could also break up, although the amount of legislation tying EU countries to Brussels might be significant enough to prevent dissolution. The European single market and ‘Europe without borders’, however, would be more likely to disappear.

Abandoning the euro might also result in a 1930s-style depression and contribute to a rise in populism across Europe. Heisbourg was quick to note that a collapse of the euro would not lead to another world war like those in the twentieth century, which were the ‘product of hegemonic aspirations’, not economically declining states. It would also not lead to a repeat of the Balkan wars, he insisted; despite the projected weakness of the EU, the advantages of membership would still encourage peace in the Balkans.

If the euro survived, Europe would avoid such a depression, he continued. But the eurozone countries would experience deep differentiation, with the United Kingdom moving even further away from the eurozone. Non-euro countries would have less incentive and ability to join the euro, leaving them in a precarious situation perched between Europe and the East.

Professor Heisbourg concluded his remarks by making two recommendations for the United States. Firstly, he implored the US Congress to prevent sequestration by reaching a budget agreement. Secondly, he warned against the temptation for the US to strengthen bilateral agreements with individual European countries at the expense of the EU. Instead, he encouraged the US to nurture the NATO alliance as a way of strengthening European unity.

Watch the full talk


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