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The Eurozone Plans for the Worst

The Eurozone Plans for the Worst

In Italy, the government is hanging on by a thread. But no matter when the country holds its next general elections, the fact that almost half its electorate supports parties that want to leave the eurozone will put international markets and eurozone governments on edge. The concern will be even greater since rebel members of Italy’s center-left Democratic Party announced Saturday that they had formed a new political party, which could undermine the ruling party’s performance against the Euroskeptic Five Star Movement in the next vote. France’s highest-polling party, the National Front, also wants to hold a referendum on eurozone membership.

Meanwhile, the threat of a Greek exit from the European Union looms large. Athens recently promised to implement economic reforms to receive its next tranche of bailout money, but some of the measures involve politically sensitive issues, such as pensions and labor regulations, and could trigger political instability or social unrest. Because Greece’s coalition government holds only a slim majority of the seats in Parliament, it could collapse if even a few lawmakers were to change their allegiances. And early elections in the country could turn into a referendum on eurozone membership. Now that most of Greece’s debt is in the hands of its institutional lenders, a Grexit from the eurozone would not be as calamitous today as it would have been five years ago. Nevertheless, the upheaval it would create could spread to the eurozone’s other weak links, including Italy and Spain. So soon after the Brexit, moreover, a Grexit would only deepen the European Union’s turmoil and could influence elections elsewhere in the eurozone.

The uncertainty has prompted the currency area’s members to start exploring their options. On Thursday, for instance, the Dutch legislature authorized an inquiry into the Netherlands’ future relationship with the euro. The formal trigger for the inquiry was concern over the effect that the European Central Bank’s low-interest policies are having on Dutch savers and retirees. But the investigation, whose findings will be announced later in the year, will also try to answer questions such as whether and how the Netherlands could leave the eurozone. The inquiry reveals how seriously governments and parties throughout the currency area are taking the possibility of its demise.

That the investigation was proposed by a centrist party, the Christian Democrats, and not by the Euroskeptic Party of Freedom suggests that it may be politically motivated. By launching the investigation just before the March 15 elections, moderate parties may be trying to send voters the message that they, too, worry about the effect that the common currency and fiscal policies have had on their country’s economy. At the same time, though, the inquiry shows that Dutch politicians are concerned about the currency area’s future and want to know what their options will be in the event of a terminal crisis in the eurozone. Considering the threat of a referendum on eurozone membership in France, Italy or Greece, their fears are well-founded.

The Netherlands is an important player in Northern Europe. Surrounded by Germany, France and the United Kingdom, the country centers much of its foreign policy on maintaining a balance of power in the region. Its views on how to govern the eurozone are generally close to those of Germany. The two countries, for example, have criticized plans to bail out countries in Southern Europe. Even so, the Netherlands understands the importance of the Franco-German alliance at the heart of the European Union and has been a main proponent of European integration over the past six decades. For this reason, the country is unlikely to act alone. Should the EU crisis accelerate, the Netherlands will probably try to align its policies with those of its traditional allies, Belgium and Luxembourg, and also with Germany’s strategy.

Germany, however, faces tough questions of its own. Though much of the country’s electorate — and especially its conservative voters — disapprove of the Greek bailout program, the government in Berlin wants to prevent the crisis in Greece from escalating ahead of the September elections. Consequently, Athens will probably eventually reach an agreement with its lenders, if only a stop-gap to keep it from defaulting in the next six months. By comparison, the German government will have less influence over the situation in France and Italy, countries that pose a far more serious threat to the future of European integration. If Euroskeptic forces win power in France or Italy, Berlin would go into crisis mode and immediately try to reach an understanding with the new renegade governments in Paris or Rome. But some of their demands — such as the National Front’s proposals to introduce tariffs on all imports into France or to tax companies that hire foreign workers, including EU nationals — will be difficult to accommodate without dismantling the Continental bloc in the process.

The Netherlands’ parliamentary inquiry shows that the dissolution of the eurozone, or at least its reconfiguration, is a possibility that governments are starting to factor in when assessing their options for the future. And the fact that a centrist group led the charge on the investigation reveals that Euroskeptic parties are no longer the only ones questioning the European Union’s fate. In fact, back in 2015 the Dutch Cabinet discussed a plan to replace the passport-free Schengen area with a smaller bloc made up of countries in Northern Europe.

When the eurozone was established, its main goal was to bring France and Germany so close together that another war between them would be unthinkable. But the arrangement has put its members in an impossible predicament. If the eurozone were to fall apart, its collapse would precipitate a steady estrangement between its members — especially France and Germany — jeopardizing the economic, political and military order on the Continent. On the other hand, if the eurozone holds together and continues to engender resentment among voters and raise doubts among governments and financial markets, its continuity will be under permanent threat. The constant danger, in turn, would hurt Europe’s economy and give rise to yet more radical nationalist and populist political movements in the future.

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