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MEMO POLICY

WHY THE CRISIS THREATENS THE EUROPEAN SINGLE Sebastian Dullien

Businesses leaders across are anxiously – and rightly SUMMARY Twenty years after the – following news of the euro crisis: a break-up of the single was signed, the European is currency would lead to huge macroeconomic disruptions, under threat. Even if a break-up of the single with a large expected drop in economic activity, a strong currency is averted, the euro crisis has already increase in unemployment, and potentially widespread subtly altered the single market and greatly bank failures. The shock waves would definitely not remain changed the prospects for its future. In fact, no limited to the European Monetary Union (EMU) itself, but matter how the euro crisis plays out, the single would also spread to the rest of the , to the market will never be the same as it was during and , and to emerging markets from the carefree years of the 2000s. Each of the China to India to Brazil. Countries such as or three likely basic scenarios for how the euro crisis might develop would adversely affect are simply too big to fail. In fact, a full break-up of the euro the single market to a different extent and in might dwarf the failure of Lehman Brothers in 2009. different ways. However, regardless of whether or not such a nightmare A full break-up of the has the potential scenario becomes a reality, the euro crisis has already subtly to shatter the single market beyond recognition altered the and greatly changed and threaten the . A the prospects for its future. In fact, no matter how the euro muddling-through scenario in which the crisis plays out, the single market will never be the same current crisis is contained within the single as it was during the carefree years of the 2000s. In any of currency’s existing governance structures and the plausible outcomes of the euro crisis, the single market with its existing instruments and only limited will emerge in a different, diminished shape – completely changes would reduce the depth of the single market. Even a positive scenario in which the shattered, reduced in depth or reduced in size. While it can eurozone solves the crisis by taking a great be argued that the set-up of the single market in the 2000s leap forward in terms of economic, fiscal and and gaps in oversight and regulatory framework helped fuel political integration would likely lead to the the economic imbalances that now haunt Europe, it is also withdrawal of some countries such as the UK clear that the transformation of the single market will entail and thus shrink the single market. serious costs.

To understand this proposition, we need to look at the various possible scenarios in more detail. At the moment, 2 ECFR/64 October 2012 www.ecfr.eu WHY THE EURO CRISIS THREATENS THE EUROPEAN SINGLE MARKET Euro break-up:ashatteredsinglemarket We also need to remember that the single market is far more EU member states over the past decade has been made up made been has decade past the over states member EU The worst-case scenario, obviously, would be a break-up of break-up a be would obviously, scenario, worst-case The In such a scenario, would at some point fail to Discussion so far has focused on a possible isolated exit exit isolated possible a on focused has far so Discussion andIreland. also to spread technological progress and hence increase increase hence and progress technological spread to also a single market not just on paper but also in the daily lives daily the in also but paper on just not market single a a scenario in which the current crisis is contained within the at the European (ECB). The Greek government competitiveness of the European manufacturing sector, but sector, manufacturing European the of competitiveness of in parts and components – a sign of growing cross- growing of sign a – components and parts in trade of cross- and marketing cross-border activities, cross-border eurozone solves the crisis by taking a great leap forward in forward leap great a taking by crisis the solves eurozone country can be contained or, on the other hand, whether whether hand, other the on or, contained be can country of citizens and managers. The most visible achievement of achievement visible most The managers. and citizens of with themostadvancedmemberstates. national currency and recapitalise its banks through the the through banks its a recapitalise and reintroduce currency either national choice: a with faced be then would of amount large a hold (which banks Greek off cut would to unwilling is troika the and arise needs financing new market to life. In the past two decades, the EU has become has EU the decades, two past the In life. to market might develop: first, a full break-up of the eurozone; second, much reduced in size – that is, without Greece, Italy, Spain, Italy, Greece, without is, that – size in reduced much the less visible cross-border production networks that now that networks production cross-border visible less the area Schengen however, In fact, controls. passport even longer no are there the within pleasure; or business for trips hassle-free quick, make to ability the is market single the than just the legal provisions framing it. The single market single The it. framing provisions legal the just than terms ofeconomic,fiscalandpoliticalintegration. crisis euro the how for scenarios basic likely three are there their assets in Greek government bonds) from refinancing refinancing from bonds) government Greek in assets their This again. default would and – lines credit existing up top or fragmented completely either up would eurozone the that likely very is it events, these of course the In euro. the the euro. Such a scenario could begin with the withdrawal withdrawal the with begin could scenario a Such euro. the important. A significant and growing share of trade in most in trade of share growing and significant A important. span across western and are much more more much are Europe central and western across span its existing instruments; and third, a scenario in which the which in scenario a third, and instruments; existing its its debts – either because it cannot fulfill the conditions of its of out forced be also would countries other process the in have been important not only to increase the efficiency and efficiency the increase to only not important been have single currency’s existing governance structures and with with and structures governance existing currency’s single system and a much deeper recession than it has so far far so has it than recession deeper much a and system has been shaped just as much by the actions of business business of actions the by much as just shaped been has productivity in economies of Europe that are catching up up catching are that Europe of economies in productivity leaders across the EU. It is their decisions to engage in in engage to decisions their is It EU. the across leaders printing press or accept a complete collapse of its banking its of collapse complete a accept or press printing from the single currency of one or more members. members. more or one of currency single the from border production networks. These cross-border networks networks cross-border These networks. production border border production sharing that have brought the single single the brought have that sharing production border bailouts and the troika stops loan disbursement, or because by Greece, but it is far from clear whether an exit by one one by exit an whether clear from far is it but Greece, by At the policy level, a sudden burst of competitiveness in in competitiveness of burst sudden a level, policy the At The disintegration in the monetary arena would quickly lead Italy. If the ECB is not willing to accept liquidity support support liquidity accept to willing not is ECB the If Italy. However, since a reintroduction of the drachma would would drachma the of reintroduction a since However, activities towards domestic markets. Exchange rate stability rate exchange partial least at created that arrangements press, printing the with deficits budget their finance and over power national regained their use certainly almost exchange strong of reemergence the be would break-up a accusations of unfair along the lines of the claims years or so. Such a renationalisation of business activities activities business of renationalisation a Such so. or years experienced. The odds are that any sensible government government sensible any that are odds The experienced. deposits, a Greek euro exit could send shock waves through waves shock send could exit euro Greek a deposits, even more. Thus, such a development would thrust Europe thrust would development a such Thus, more. even would eurozone the leaving countries the and devaluation faced be might governments other magnitude), this of willing not is Bundesbank the if (or trillion several of countries that devalued their currencies and an increase of increase an and currencies their devalued that countries new currency and thus a significant loss in the value of these with a similar choice as the Greek government and might might and government Greek the as choice similar a with would lead to a reorientation in both production and sales and production both in reorientation a to lead would would likely come to an almost complete standstill and costs the of any before is, that – 1970s the of instability rate a new currency would be to introducing be able to gain for competitiveness by reasons the of one As fluctuations. rate negative effectsforinnovationandproductivity. and countries all in pressure competitive less to lead would rate at a low value in the late 2000s. Calls for new non-- mean a redenomination of deposits in Greek banks into the into banks Greek in deposits of redenomination a mean markets usually is not feasible beyond a horizon of two two of horizon a beyond feasible not is usually markets made by the US against China when it had fixed its exchange to accept a further increase in the TARGET2 balances balances TARGET2 the in increase further a accept to would This in. set to expected be can towards households Spanish or Italian as soon As eurozone. the to predictasharpdropinprivateinvestment. have would one and failures bank of wave expected the this there could be initial devaluations of up to 50 percent or or percent 50 to up of devaluations initial be could there sectors banking their stabilise to bank central own their of result obvious first the areas: other in disintegration to into a devalued national currency, a large flight flight capital large a currency, national devalued a into is crucial, especially for cross-border investment and cross- and investment cross-border for especially crucial, is in the 1980s and early 1990s. Moreover, cross-border finance in a number of markets for different and services with stability, such as the European Exchange Rate mechanism, Rate Exchange European the as such stability, learn that a euro in the bank can be quickly retransformed quickly be can bank the in euro a that learn ultimately decidetoleavetheeuroaswell. level, the increased risks and costs of cross-border trade trade cross-border of costs and risks increased the level, levels: the business level and the policy level. At the business unemployment in the other countries would quickly cause cause quickly would countries other the in unemployment Such a development would disrupt the single market on two faced with these options would choose to leave the eurozone. further increase liquidity pressure on banks in Spain and and Spain in banks on pressure liquidity increase further for insuring against exchange rate risks would surge. Add to border production networks, as hedging through financial financial through hedging as networks, production border back in time to the period of violent monetary and exchange barriers for trade, capital controls or new subsidies for ailing Muddling through: a shallower industries could be expected to follow soon. As the break- single market up of the eurozone would almost certainly entail balance- of-payments difficulties for at least some member states, a The second-worst outcome of the euro crisis from the least some of these actions would even be legal under Article perspective of the future of the single market is a muddling- 144 of the Treaty on the Functioning of the European Union, through scenario. In this scenario, there would be no which stipulates that EU member states may take unilateral strong move towards a , but rather only partial action to protect their balance of payments even if these fixes. Incremental steps towards greater integration and restrictions damage the single market. the existing rescue mechanisms would be able to stabilise interest rates on government bonds in the crisis countries at Normally, one might hope that, together with the European an elevated but not excessively high level. In such a scenario, Court of Justice (ECJ), the could economic growth would remain subdued in the eurozone protect the single market against these threats. However, in over years and the euro periphery would experience only the break-up scenario, this hope will most likely be in vain. a very slow and sluggish recovery from its recession. This Under current EU law, it is not possible to leave the euro. scenario could also include a sub-scenario in which a small Thus in order to leave, a country would have to either leave country such as Greece leaves the euro but the fallout the EU altogether, violate EU law and hope that no one will is contained and the other euro members remain in the take action, or seek a change to the European Treaties to monetary union. accommodate economic realities. But each of these options would diminish the power of the Commission and the ECJ: In such a scenario, brutal exchange rate movements and the EU would no longer have jurisdiction over a country that outright attempts at beggar-thy-neighbour policies through left the EU altogether; an open and tolerated violation of EU nominal devaluations would be prevented. But there would law would undermine the legitimacy of the EU institutions; still be dangers for the single market. In particular, the de and a treaty change would create the impression that EU facto disintegration in the markets for banking and other rules were open to alteration whenever opportune. that we have seen in recent months could be expected to continue. Already, banks across the eurozone Moreover, the legitimacy and power of the European have renationalised their business and cut back cross- Commission stems to a large extent from the acceptance of border lending significantly. Over the medium term, this its rulings at the national level. If, in a situation of large- development will lead to a new fragmentation of financing scale exchange rate fluctuations, deep recessions, record conditions and financing costs along national borders. unemployment and a general feeling that member states were unfairly taking advantage of each other, national This would have two effects. First, diminished competitive governments might be inclined to openly revolt against pressure would lead to less innovation in the quality and European Commission proposals and regulations and ECJ price of financial and payment services for companies and rulings. This would not only tie up resources that could EU citizens. Second, it would drive a permanent wedge otherwise have been used to push forward the single market, between financing costs in Germany, the and but might in the end also force the EU institutions to take a on the one hand and Spain, Italy and Greece on more cautious approach in enforcing the single market. the other. As the journalist Paul Taylor puts it, “the best- managed Spanish or Italian banks or companies have to pay The Schengen agreement could also quickly come under far more for loans, if they can get them, than their worst- pressure if the euro disintegrates. The deep recession managed German or Dutch peers.”1 For example, Spanish following the disintegration of EMU would cause new flows global firms like Santander whose operations are largely of migrants from crisis countries to the rest of the EU. As conducted outside Spain (only 13 percent of Santander’s unemployment would rise all over Europe, these migrants profits are earned in Spain) have to face higher borrowing would not always be welcome in the countries to which they costs than their European counterparts, thus negatively moved and might trigger a new wave of xenophobia. As affecting their market position. Such a fragmentation of we have seen in the past, this might be used by nationalist markets for banking services is not fair because it punishes forces as an occasion to reinterpret, counteract or even pull companies for their location and not efficient because it out of the Schengen agreement and erect new barriers to the cancels the benefits of free markets, which are supposed free movement of labour within the EU. to reward the best companies and punish poorly managed ones. In addition, such a situation could lead to calls for In short, a full-blown break-up of the euro has the government subsidies in countries with high financing potential to shatter the single market beyond recognition. costs to prevent de-industrialisation and potentially also Fortunately, such a full-blown break-up is not yet the most likely scenario – even though one should now attribute a non-trivial probability to such a catastrophic chain of events.

1 Paul Taylor, “Signs are growing that Europe's economic and monetary union may be fragmenting faster than policymakers can repair it”, Reuters, 9 July 2012, available at http://www.reuters.com/article/2012/07/09/us-eurozone-banking-policy- idUSBRE86805N20120709 3 4 ECFR/64 October 2012 www.ecfr.eu WHY THE EURO CRISIS THREATENS THE EUROPEAN SINGLE MARKET Again, the European Commission and the ECJ are usually usually are ECJ the and Commission European the Again, As in the break-up scenario, though to a lesser extent, this extent, lesser a to though scenario, break-up the in As Fiscal union:asmallersinglemarket European level to counter macroeconomic imbalances. To To imbalances. macroeconomic counter to level European (almost) retain its size and geographical coverage, it would it coverage, geographical and size its retain (almost) The third scenario is economically the most promising promising most the economically is scenario third The Thus while the muddling-through scenario looks better better looks scenario muddling-through the while Thus the to threats poses also scenario muddling-through The The renationalisation of banking would also have another, another, have also would banking of renationalisation The Prohibiting subsidies that clearly distort the single market market single the distort clearly that subsidies Prohibiting and financial supervision and oversight, at least some some least at oversight, and supervision financial and and fiscal of terms in forward leap great a take actually an increase in unemployment and the long recession in the in recession long the and unemployment in increase an and would cause conflicts with member states governments. cnmc oiy nerto. hs ol eti a full- a entail would This integration. policy economic countries. Again, the danger is that this will be exploited exploited be will this that is danger the Again, countries. even shrinkingmarket. great leap forward in integration, this muddling-through muddling-through this integration, in forward leap great damage to the single market. While the single market might expected to focus more on production in their home markets. rescue capacities, for example by the ECB stepping up up stepping ECB the by example for capacities, rescue would lower competitive pressure and reduce innovation in innovation reduce and pressure competitive lower would with politicians unwilling or unable to push strongly for a for strongly push to unable or unwilling politicians with mechanism at the European level, centralised banking banking centralised level, European the at mechanism movement ofpeoplewithintheEU. member states compete for market shares in a stagnating or more expensive. Again, business could to a certain extent be become would financing as consequence: subtle more issue another is services) financing and banking for market the introduction of some inter-regional transfers to the the to transfers inter-regional some of introduction the secondary in scale large a on intervene to promises its to than the full-blown break-up, it still entails significant significant entails still it break-up, full-blown the than the singlemarket. to correct a market failure in other markets (in this case the scenario. this in dilemmas of number a face would they some transfer of revenue sources to the European level and level European the to sources revenue of transfer some south would create new flows of migrants to the northern northern the to migrants of flows new create would south is one thing, but prohibiting subsidies that are introduced introduced are that subsidies prohibiting but thing, one is but states, member by policies such prevent to supposed scenario haslonglookedtobethemostlikelyone. scarcer and more expensive in some countries, cross-border partial mutualisation of debt, a significant increase in the the in increase significant a debt, of mutualisation partial up scenario. Weak economic growth in Europe would mean would Europe in growth economic Weak scenario. up production sharing or might become riskier and Schengen agreement, albeit not as acute as the euro break- euro the as acute as not albeit agreement, Schengen fulfill demands of the German constitution and the German fledged banking union with a restructuring/recapitalisation area euro the of leaders the scenario, this In Europe. for for protectionist measures by their peers in the north as all as north the in peers their by measures protectionist for bonds markets or granting a banking licence to the ESM, ESM, the to licence banking a granting or markets bonds by nationalist politicians to push for a rollback of the free free the of rollback a for push to politicians nationalist by be significantly shallower. This is especially tragic because, tragic especially is This shallower. significantly be With the risk of a euro break-up off the table, cross-border table, the off break-up euro a of risk the With European level, either through a strengthened European European strengthened a through either level, European EU altogether. The real banking union that eurozone leaders are now now are leaders eurozone that union banking real The The drive towards more coherent financial sector sector financial coherent more towards drive The In economic terms, such a move towards true federalism federalism true towards move a such terms, economic In However, even this positive scenario entails risks for the the for risks entails scenario positive this even However, British government, which has traditionally had a strong strong a had traditionally has which government, British trend. this to add would confidence business Returning Parliament or through the introduction of a new chamber chamber new a of introduction the through or Parliament a counterparty is limited. Thus, over time, there would would there time, over Thus, limited. is counterparty a the of either if controlled fully be only can risk bank’s a among countries would converge again once the risk of of risk the once again converge would countries among a number of continental European governments and the the and governments European continental of number a Commission on the single supervisory mechanism (SSM) (SSM) mechanism supervisory single the on Commission n hne ant ed o effliln seuain n a on speculation self-fulfilling to lead levels cannot hence unsustainable and to rates interest push cannot alone counterparties’ risk is also controlled or if exposure to to exposure if or controlled also is risk counterparties’ of centralisation stronger much a mean would discussing constitutional court, such a leap of integration would have would integration of leap a such court, constitutional eurozone countries. compromises made in the legislative process up to the end the to up process legislative the in made compromises oversight – at least within the eurozone itself. However, However, itself. eurozone the within least at – oversight eurozone countries – and therefore within the framework framework the within therefore and – countries eurozone the among cooperation enhanced through above described government on premiums risk more, any default country’s of 2011 meant that national supervisory authorities kept kept authorities supervisory national that meant 2011 of of the banking and financial sector in the core will be viable be will core the in sector financial and banking the of unlikely is it however, practice, In Europe. two-speed a of steps integration the of many taking imagine could one national interest in protecting its financial industry. The The industry. financial its protecting in interest national national financial institutions and the European authorities without at least some of the other member states leaving the periphery. the in recession current the from recovery made up from deputies from the national parliaments of of parliaments national the from deputies from up made to come with stronger democratic legitimisation at the the at legitimisation democratic stronger with come to that such a two-speed Europe with a stronger integration integration stronger a with Europe two-speed a such that standards for non-euro EU banks as they do for eurozone eurozone for do they as banks EU non-euro for standards supervisors whattodo. improving debtsustainabilityacrossEurope. in the eurozone would be much stronger in the coming years, budgets national to crises banking national from spillover uevso i Erp atr h flot f h U sub- US the of fallout the after Europe in supervision significant discretion in the regulation and oversight of their single market and . In principle, principle, In integration. European and market single costs Financing crisis. euro the end to potential the has had limited power when it came to ordering national national ordering to came it when power limited had has been mitigated. Once it is clear that market sentiment sentiment market that clear is it Once mitigated. been has prime crisis 2008/9 has already created conflicts between between conflicts created already has 2008/9 crisis prime for financial institutions implicitly assume that EU member financial flows would grow again. Overall, economic growth quicker a hence and path adjustment fiscal slower a for banks. In fact, the recent proposals by the European European the by proposals recent the fact, In banks. similar impose to authorities eurozone by pressure be bonds would fall. Lower interest rate payments would allow states outside the eurozone will follow the rules set by began, the single market is still envied. But with cracks in the ECB. If member states such as the UK do not accept the single market appearing, it too could lose some of its this, eurozone legislators might try to limit business with shine. counterparties outside the eurozone. Unless the UK accepts the eurozone regulator’s decisions, the markets for financial This will have important consequences for the EU’s services would break up along currency lines. Both options influence in global trade negotiations and international would seriously alter the British cost-benefit calculation coordination. First, emerging markets will of its EU membership: accepting eurozone regulators’ be less willing to accept advice from Europe if the general rulings would mean a loss of sovereignty in an important perception is that the old continent is unable to solve its own policy area; a fragmentation of the financial market at the economic problems sufficiently. This will make it harder for eurozone’s border would be against the British financial Europe to pursue its interests in international institutions sector’s business interests and make EU membership less like the or the International Monetary Fund (IMF). attractive. Second, it will be harder for the EU to negotiate preferential trade agreements and agreements. If the single Another possible point of conflict is the plan by continental market is diminished in any of the three ways described Europe to impose a financial transaction (FTT) and other above, getting access to it will become less attractive. Other bank levies to pay for the bank rescues now underway in the countries around the world could therefore be less willing eurozone. If countries such as the UK did not participate, it to make concessions in return for a with would lead to losses in revenue, which could create political the EU. pressure for either compensatory payments or capital controls to prevent . All this has the potential to It is above all policymakers who can limit this fallout. A turn public opinion in some non-euro countries even further leap towards more integration at the core seems to be the against the EU and increase the risk of an exit from the EU. least bad option for the single market, even if it risks being But even if such can be contained, measures reduced in size and there is some disintegration at the fringe. by eurozone countries would lead to a further fragmentation Of course, safeguarding the single market is not the only of financial markets between euro-ins and euro-outs. objective for policymakers. They have to weigh the cost and benefits of different policy paths. But it is important that Thus even in the best-case scenario the single market they do not deceive themselves and believe that the single would suffer. Although it would not be shattered or market can be separated from the current euro issues. The become shallower, the likelihood of a withdrawal of one euro has been a catalyst for many elements of the deep de or several countries from the EU would increase and there facto of Europe that now exists. But will almost certainly a certain degree of disintegration in conversely, the euro crisis has also hit the single market. the financial and banking market along currency lines. In other words, deeper integration in the core would come The potential cost of a shattered single market needs to be with disintegration in the EU’s periphery and shrink the taken into account when deciding what to give up to save the single market. In other words, it might be the least bad – euro – not only in terms of monetary costs but also in terms rather than best – scenario. The UK might try to negotiate of national sovereignty. But this lesson is also important for a relationship to the EU similar to that of or the non-euro EU member states such as the UK: beyond the in order to remain part of the single market for adverse short-term impact of the recession in the eurozone goods. Moreover, one might even argue that the benefits of on the rest of the EU, there are potential long term costs a more deeply integrated core single market compensate to of the current euro crisis for them. When deciding whether a large degree for the costs of a geographically downsized and how much they will contribute to eurozone bailouts, single market. But this least bad scenario is not the most and how much of a two-speed Europe they are prepared to probable of the three. accept, they should take these costs into account.

Business leaders also have a role to play. They need to The impact on the EU’s standing become more aware of the benefits the single market has in the world brought them and of the risk the euro crisis entails for them. They need to clearly define their interests and then lobby Thus, 20 years after its inception, the outlook for the vigorously for a solution to the crisis that will be conducive single market is not bright. This may have consequences for their business activities. At times, they will need to for Europe’s standing in the world. For years, people all step up and publicly support potentially unpopular steps around the world have admired the peaceful integration of towards closer integration. The single market has been a Europe. In fact, a host of regional groups of countries from great project that has brought a large number of benefits to Asia over Africa to South America have actually tried to copy Europe, from better consumer choices to easier production European integration when drawing up their own regional sharing to a vast market for European firms to develop and institutions and rules. Even if the latest step in European test their products. Twenty years after the Single European integration, the single currency, is now viewed with more Act that established this single market was signed, it now scepticism around the world than it was before the crisis needs all the support Europe can collectively muster. 5 6 ECFR/64 October 2012 www.ecfr.eu WHY THE EURO CRISIS THREATENS THE EUROPEAN SINGLE MARKET About the author the About

Economics at HTW Berlin, the University of Applied Applied of University the Berlin, HTW at Economics is a Senior Policy Fellow at the European the at Fellow Policy Senior a is Dullien Sebastian Council on Foreign Relations and a professor of International the eurocrisis long shadow of ordoliberalism: Germany's approach to to approach Germany's ordoliberalism: of shadow long the German magazine magazine German the then on the economics desk. He writes a monthly column in the to Spiegel Online. His publications for ECFR include include ECFR for publications His Online. Spiegel to Sciences. From 2000 to 2007 he worked as a journalist for journalist a as worked he 2007 to 2000 From Sciences. Financial Times Deutschland (with UlrikeGuérot,2012). Capital Capital and is a regular contributor regular a is and , first as a leader writer and The The Acknowledgements Among the many with which the topic has been discussed, discussed, been has topic the which with many the Among José Ignacio Torreblanca provided valuable insights and and insights valuable provided Torreblanca Ignacio José This memo has benefited from ongoing discussions within within discussions ongoing from benefited has memo This Boehnke, Ulrike Guérot, Mark Leonard, Thomas Klau and and Klau Thomas Leonard, Mark Guérot, Ulrike Boehnke, and smooth. Hans Kundnani did a great job editing the the editing job great a did Kundnani Hans smooth. and Gouttebroze, made the internal publication process swift swift process publication internal the made Gouttebroze, comments and suggestions by Marco de Andreis, Olaf Olaf Andreis, de Marco by suggestions and comments Daniela and Schieritz Mark Kapoor, Sony by comments the ECFR and with politicians, bankers and observers. observers. and bankers politicians, with and ECFR the in particular Alba Lamberti, Nicholas Walton and Alexia Alexia and Walton Nicholas Lamberti, Alba particular in helped structure the argument. The ECFR team in London, in team ECFR The argument. the structure helped underexposed intheoriginaldraft. otherwise angles additional important suggesting and piece Schwarzer proved especially useful. Inside the ECFR, ECFR, the Inside useful. especially proved Schwarzer Among members of the on Foreign Relations are John Bruton () Hanzade Dog˘an Boyner Hans Hækkerup () former prime ministers, presidents, Former European Commission () Former Chairman, Defence European commissioners, current Ambassador to the USA; former Prime Chair, Dog˘an Gazetecilik and Dog˘an Commission; former Defence Minister Minister (Taoiseach) and former parliamentarians and On-line Heidi Hautala (Finland) ministers, public intellectuals, Minister for International Development business leaders, activists and Ian Buruma Andrew Duff cultural figures from the EU member (The Netherlands) () Writer and academic Sasha Havlicek states and candidate countries. Member of the (United Kingdom) Erhard Busek () Mikuláš Dzurinda () Executive Director, Institute for Strategic Asger Aamund (Denmark) Chairman of the Institute for the Former Foreign Minister Dialogue (ISD) President and CEO, A. J. Aamund A/S Danube and Central Europe and Chairman of Bavarian Nordic A/S Hans Eichel (Germany) Connie Hedegaard (Denmark) Jerzy Buzek () Former Commissioner for Climate Action Urban Ahlin () Member of the European Parliament; Deputy Chairman of the Foreign former President of the European Rolf Ekeus (Sweden) Steven Heinz (Austria) Parliament; former Prime Minister Former Executive Chairman, United Co-Founder & Co-Chairman, Affairs Committee and foreign Lansdowne Partners Ltd policy spokesperson for the Social Nations Special Commission on Iraq; Democratic Party Gunilla Carlsson (Sweden) former OSCE High Commissioner on Minister for International Development National Minorities; former Chairman Annette Heuser (Germany) Cooperation Executive Director, Bertelsmann Martti Ahtisaari (Finland) Stockholm International Peace Foundation Washington DC Chairman of the Board, Crisis Maria Livanos Cattaui Research Institute, SIPRI Management Initiative; former Diego Hidalgo (Spain) President (Switzerland) Uffe Ellemann-Jensen Co-founder of Spanish newspaper El Former Secretary General of the (Denmark) País; Founder and Honorary President, Giuliano Amato (Italy) International Chamber of Commerce Chairman, Baltic Development Forum; FRIDE Former Prime Minister; Chairman, former Foreign Minister Scuola Superiore Sant’Anna; Ipek Cem Taha (Turkey) Jaap de Hoop Scheffer Chairman, Istituto della Enciclopedia Director of Melak Investments/ Steven Everts Italiana Treccani; Chairman, Centro Journalist (The Netherlands) (The Netherlands) Former NATO Secretary General Studi Americani Carmen Chacón (Spain) Adviser to the Vice President of the Gustavo de Aristegui (Spain) Former Minister of Defence European Commission and EU High Danuta Hübner (Poland) Diplomat; former Member of Representative for Foreign and Security Member of the European Parliament; Parliament Charles Clarke Policy former (United Kingdom) Tanja Fajon () Anna Ibrisagic (Sweden) Viveca Ax:son Johnson Visiting Professor of Politics, University Member of the European Parliament Member of the European Parliament (Sweden) of East Anglia; former Home Secretary Chairman of Nordstjernan AB Gianfranco Fini (Italy) Jaakko Iloniemi (Finland) Nicola Clase (Sweden) President, Chamber of Deputies; Former Ambassador; former Executive Gordon Bajnai () Ambassador to the United Kingdom; former Foreign Minister Director, Crisis Management Initiative Former Prime Minister former State Secretary Joschka Fischer (Germany) Toomas Ilves () Dora Bakoyannis (Greece) Daniel Cohn-Bendit (Germany) Former Foreign Minister and vice- President Member of Parliament; former Foreign Member of the European Parliament Chancellor Minister Wolfgang Ischinger (Germany) Robert Cooper Karin Forseke (Sweden/USA) Chairman, Munich Security Leszek Balcerowicz (Poland) (United Kingdom) Chairman, Alliance Trust Plc Conference; Global Head of Professor of Economics at the Warsaw Counsellor of the European External Government Affairs Allianz SE School of Economics; former Deputy Action Service Lykke Friis (Denmark) Prime Minister Member of Parliament; former Minister Minna Järvenpää Gerhard Cromme (Germany) for Climate, Energy and Gender (Finland/US) Lluís Bassets (Spain) Chairman of the Supervisory Board, Equality Deputy Director, El País ThyssenKrupp International Advocacy Director, Open Jaime Gama (Portugal) Society Foundation Marek Belka (Poland) Maria Cuffaro (Italy) Former Speaker of the Parliament; 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Jean-Luc Dehaene () Director, Centre for European Reform Member of the European Parliament; Bassma Kodmani (France) Ingrid Bonde (Sweden) former Prime Minister Jean-Marie Guéhenno (France) Executive Director, Arab Reform CFO & Deputy CEO, Vattenfall AB Deputy Joint Special Envoy of the Initiative Gianfranco Dell’Alba (Italy) United Nations and the League of Emma Bonino (Italy) Director, Confindustria Delegation Arab States on Syria. 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(Germany) Former Minister of Foreign Affairs Member of Parliament and Former Defence Minister Tibor Dessewffy (Hungary) Ivan Krastev (Bulgaria) spokesperson for foreign affairs President, DEMOS Hungary and defence István Gyarmati (Hungary) Chair of Board, Centre for Liberal President and CEO, International Strategies Centre for Democratic Transition 7 Aleksander Kwas´niewski Daithi O’Ceallaigh (Ireland) Stefano Sannino (Italy) Vaira Vike-Freiberga () (Poland) Director-General, Institute of Director General for Enlargement, Former President International and European Affairs European Commission Former President Antonio Vitorino (Portugal) Mart Laar (Estonia) Christine Ockrent (Belgium) Javier Santiso (Spain) Lawyer; former EU Commissioner Minister of Defence; former Prime Editorialist Director, Office of the CEO of Telefónica Europe Andre Wilkens (Germany) Minister Andrzej Olechowski (Poland) Director Mercator Centre Berlin and Miroslav Lajcˇák (Slovakia) Former Foreign Minister Marietje Schaake Director Strategy, Mercator Haus Deputy Prime Minister and Foreign Dick Oosting (The Netherlands) (The Netherlands) Carlos Alonso Zaldívar (Spain) Minister CEO, European Council on Foreign Member of the European Parliament Former Ambassador to Brazil Alexander Graf Lambsdorff Relations; former Europe Director, Klaus Scharioth (Germany) Amnesty International Stelios Zavvos (Greece) (Germany) Dean of the Mercator Fellowship CEO, Zeus Capital Managers Ltd Member of the European Parliament Mabel van Oranje on International Affairs; former Ambassador of the Federal Republic of Samuel Žbogar (Slovenia) Pascal Lamy (France) (The Netherlands) Germany to the US EU Representative to ; former Honorary President, Notre Europe and Senior Adviser, The Elders Foreign Director-General of WTO; former EU Pierre Schori (Sweden) Commissioner Marcelino Oreja Aguirre (Spain) Chair, Olof Palme Memorial Fund; Member of the Board, Fomento de former Director General, FRIDE; former Bruno Le Maire (France) Construcciones y Contratas; former EU SRSG to Cote d’Ivoire Member of Parliament; Former Minister Commissioner for Food, Agriculture & Fishing Wolfgang Schüssel (Austria) Monica Oriol (Spain) Member of Parliament; former Mark Leonard CEO, Seguriber Chancellor (United Kingdom) Cem Özdemir (Germany) Karel Schwarzenberg Director, European Council on Foreign Leader, Bündnis90/Die Grünen Relations () (Green Party) Foreign Minister Jean-David Lévitte (France) Ana Palacio (Spain) Former Sherpa to the President of the Former Foreign Minister; former Senior Giuseppe Scognamiglio (Italy) French Republic; former Ambassador to President and General Counsel of the Executive Vice President, Head of Public the United States World Bank Group Affairs Department, UniCredit S.p.A Sonia Licht () Simon Panek (Czech Republic) Narcís Serra (Spain) President, Belgrade Fund for Political Chairman, People in Need Foundation Chair of CIDOB Foundation; former Vice Excellence President of the Spanish Government Chris Patten (United Kingdom) WHY THE EURO CRISIS THREATENS THE EUROPEAN SINGLE MARKET Juan Fernando López Aguilar Chancellor of Oxford University and co- Radosław Sikorski (Poland) (Spain) chair of the International Crisis Group; Foreign Minister Member of the European Parliament; former EU Commissioner Aleksander Smolar (Poland) former Minister of Justice Diana Pinto (France) Chairman of the Board, Stefan Batory Adam Lury (United Kingdom) Historian and author Foundation CEO, Menemsha Ltd Javier Solana (Spain) Jean Pisani-Ferry (France) Former EU High Representative for the Monica Macovei (Romania) Director, Bruegel; Professor, Université Common Foreign and Security Policy & Member of the European Parliament Paris-Dauphine Secretary-General of the Council of the Emma Marcegaglia (Italy) Ruprecht Polenz (Germany) EU; former Secretary General of NATO CEO of Marcegalia S.p.A; former Member of Parliament; Chairman of the George Soros President, Confindustria Bundestag Foreign Affairs Committee (Hungary/USA) Katharina Mathernova (Slovakia) Lydie Polfer () Founder and Chairman, Open Society Senior Advisor, World Bank Member of Parliament; former Foreign Foundations Minister I´ñigo Méndez de Vigo (Spain) Teresa de Sousa (Portugal) Secretary of State for the European Charles Powell Journalist Union (Spain/United Kingdom) Director, Real Instituto Elcano Goran Stefanovski (Macedonia) David Miliband Playwright and Academic (United Kingdom) Andrew Puddephatt Rory Stewart Member of Parliament; Former (United Kingdom) (United Kingdom) Secretary of State for Foreign and Director, Global Partners & Associated Member of Parliament Commonwealth Affairs Ltd. Alexander Stubb (Finland) Alain Minc (France) Vesna Pusic´ () Minister for Foreign Trade and President of AM Conseil; former Foreign Minister European Affairs; former Foreign chairman, Le Monde Robert Reibestein Minister Nickolay Mladenov (Bulgaria) (The Netherlands) Michael Stürmer (Germany) Foreign Minister; former Defence Director, McKinsey & Company Chief Correspondent, Die Welt Minister; former Member of the European Parliament George Robertson Ion Sturza (Romania) (United Kingdom) President, GreenLight Invest; former Dominique Moïsi (France) Former Secretary General of NATO Prime Minister of the Republic of Senior Adviser, IFRI Albert Rohan (Austria) Pierre Moscovici (France) Former Secretary General for Foreign Paweł S´wieboda (Poland) Finance Minister; former Minister for Affairs President, Demos EUROPA - Centre for European Affairs European Strategy Adam D. Rotfeld (Poland) Nils Muiznieks (Latvia) Former Minister of Foreign Affairs; Vessela Tcherneva (Bulgaria) Commissioner for Co-Chairman of Polish-Russian Group Spokesperson and advisor, Ministry of www.ecfr.eu Rights on Difficult Matters, Commissioner of Foreign Affairs Euro-Atlantic Security Initiative Hildegard Müller (Germany) Teija Tiilikainen (Finland) Chairwoman, BDEW Bundesverband Norbert Röttgen (Germany) Director, Finnish Institute for der Energie- und Wasserwirtschaft Minister for the Environment, International Relations Conservation and Nuclear Safety Wolfgang Münchau (Germany) Luisa Todini (Italy) President, Eurointelligence ASBL Olivier Roy (France) Chair, Todini Finanziaria S.p.A Alina Mungiu-Pippidi (Romania) Professor, European University Institute, Florence Loukas Tsoukalis (Greece) Professor of Democracy Studies, Hertie Professor, University of Athens and October 2012 School of Governance Daniel Sachs (Sweden) President, ELIAMEP CEO, Proventus Kalypso Nicolaïdis Erkki Tuomioja (Finland) (Greece/France) Pasquale Salzano (Italy) Foreign Minister Professor of International Relations, Vice President for International University of Oxford Governmental Affairs, ENI Daniel Valtchev, (Bulgaria) ECFR/64 Former Deputy PM and Minister of 8 Education Also available A Global China Policy Europe and the Arab Revolutions: A Power Audit of EU-North Africa from ECFR François Godement, June 2010 A New Vision for Democracy and Relations (ECFR/22) Nick Witney and Anthony Dworkin, New World Order: The Balance Susi Dennison and Anthony Dworkin, September 2012 (ECFR/62) of Soft Power and the Rise of Towards an EU Human Rights November 2011 (ECFR/41) Herbivorous Powers Strategy for a Post-Western World Transnistria: A Bottom-up Solution Ivan Krastev and Mark Leonard, Susi Dennison and Anthony Dworkin, Spain after the Elections: the Nicu Popescu and Leonid Litra, October 2007 (ECFR/01) September 2010 (ECFR/23) “Germany of the South”? September 2012 (ECFR/63) José Ignacio Torreblanca and Mark A Power Audit of EU-Russia The EU and Human Rights at the Leonard, November 2011 (ECFR/42) Relations UN: 2010 Review Mark Leonard and Nicu Popescu, Richard Gowan and Franziska Four Scenarios for the Reinvention November 2007 (ECFR/02) Brantner, September 2010 (ECFR/24) of Europe Mark Leonard, November 2011 Poland’s second return to Europe? The Spectre of a Multipolar Europe (ECFR/43) Paweł Swieboda, December 2007 Ivan Krastev & Mark Leonard with (ECFR/03) Dimitar Bechev, Jana Kobzova Dealing with a Post-Bric Russia & Andrew Wilson, October 2010 Ben Judah, Jana Kobzova and Nicu Afghanistan: Europe’s (ECFR/25) Popescu, November 2011 (ECFR/44) forgotten war Daniel Korski, January 2008 (ECFR/04) Beyond Maastricht: a New Deal for Rescuing the euro: what is China’s the Eurozone price? Meeting Medvedev: The Politics of Thomas Klau and François François Godement, November 2011 the Putin Succession Godement, December 2010 (ECFR/26) (ECFR/45) Andrew Wilson, February 2008 (ECFR/05) The EU and Belarus after the A “Reset” with Algeria: the Russia Election to the EU’s South Re-energising Europe’s Security and Balázs Jarábik, Jana Kobzova Hakim Darbouche and Susi Defence Policy and Andrew Wilson, January 2011 Dennison, December 2011 (ECFR/46) Nick Witney, July 2008 (ECFR/06) (ECFR/27) after the Tymoshenko Can the EU win the Peace in After the Revolution: Europe and verdict ? the Transition in Tunisia Andrew Wilson, December 2011 Nicu Popescu, Mark Leonard and Susi Dennison, Anthony Dworkin, (ECFR/47) Andrew Wilson, August 2008 (ECFR/07) Nicu Popescu and Nick Witney, March 2011 (ECFR/28) European Foreign Policy Scorecard A Global Force for Human Rights? 2012 An Audit of European Power at European Foreign Policy Scorecard February 2012 (ECFR/48) the UN 2010 Richard Gowan and Franziska March 2011 (ECFR/29) The Long Shadow of Brantner, September 2008 (ECFR/08) Ordoliberalism: Germany’s The New German Question: How Approach to the Euro Crisis Beyond Dependence: How to deal Europe can get the Germany it Sebastian Dullien and Ulrike Guérot, with Russian Gas needs February 2012 (ECFR/49) Pierre Noel, November 2008 (ECFR/09) Ulrike Guérot and Mark Leonard, April 2011 (ECFR/30) The End of the Putin Consensus Re-wiring the US-EU relationship Ben Judah and Andrew Wilson, Daniel Korski, Ulrike Guerot and Mark Turning Presence into Power: March 2012 (ECFR/50) Leonard, December 2008 (ECFR/10) Lessons from the Eastern Neighbourhood Syria: Towards a Political Solution Shaping Europe’s Afghan Surge Nicu Popescu and Andrew Wilson, Julien Barnes-Dacey, March 2012 Daniel Korski, March 2009 (ECFR/11) May 2011 (ECFR/31) (ECFR/51)

A Power Audit of EU-China Relations Egypt’s Hybrid Revolution: a Bolder How the EU Can Support Reform John Fox and Francois Godement, EU Approach in Burma April 2009 (ECFR/12) Anthony Dworkin, Daniel Korski and Jonas Parello-Plesner, March 2012 Nick Witney, May 2011 (ECFR/32) (ECFR/52) Beyond the “War on Terror”: Towards a New Transatlantic A Chance to Reform: How the EU China at the crossroads Framework for Counterterrorism can support Democratic Evolution François Godement, April 2012 Anthony Dworkin, May 2009 (ECFR/13) in Morocco (ECFR/53) Susi Dennison, Nicu Popescu and The Limits of Enlargement-lite: José Ignacio Torreblanca, Europe and Jordan: Reform before European and Russian Power in the May 2011 (ECFR/33) it’s too late Troubled Neighbourhood Julien Barnes-Dacey, April 2012 Nicu Popescu and Andrew Wilson, China’s Janus-faced Response to (ECFR/54) June 2009 (ECFR/14) the Arab Revolutions Jonas Parello-Plesner and Raffaello China and Germany: Why the The EU and human rights at the UN: Pantucci, June 2011 (ECFR/34) Emerging Special Relationship 2009 annual review Matters for Europe Richard Gowan and Franziska What does Turkey think? Hans Kundnani and Jonas Parello- Brantner, September 2009 (ECFR/15) Edited by Dimitar Bechev, June 2011 Plesner, May 2012 (ECFR/55) (ECFR/35) What does Russia think? After Merkozy: How France and edited by Ivan Krastev, Mark Leonard What does Germany think about Germany Can Make Europe Work and Andrew Wilson, September 2009 Europe? Ulrike Guérot and Thomas Klau, (ECFR/16) Edited by Ulrike Guérot and May 2012 (ECFR/56) Jacqueline Hénard, June 2011 Supporting Moldova’s Democratic (ECFR/36) The EU and Azerbaijan: Beyond Oil Transition Jana Kobzova and Leila Alieva, Nicu Popescu, October 2009 (ECFR/17) The Scramble for Europe May 2012 (ECFR/57) François Godement and Jonas Can the EU rebuild failing states? A Parello-Plesner with Alice Richard, A Europe of Incentives: How to review of Europe’s Civilian Capacities July 2011 (ECFR/37) Regain the Trust of Citizens and Daniel Korski and Richard Gowan, Markets October 2009 (ECFR/18) Palestinian Statehood at the UN: Mark Leonard and Jan Zielonka, Why Europeans Should Vote “Yes” June 2012 (ECFR/58) Towards a Post-American Europe: Daniel Levy and Nick Witney, A Power Audit of EU-US Relations September 2011 (ECFR/38) The Case for Co-operation in Jeremy Shapiro and Nick Witney, Crisis Management October 2009 (ECFR/19) The EU and Human Rights at the Richard Gowan, June 2012 (ECFR/59) UN: 2011 Review Dealing with Yanukovych’s Ukraine Richard Gowan and Franziska The Periphery of the Periphery: The Andrew Wilson, March 2010 Brantner, September 2011 (ECFR/39) Western Balkans and the Euro Crisis (ECFR/20) Dimitar Bechev, August 2012 (ECFR/60) How to Stop the Demilitarisation Beyond Wait-and-See: The Way of Europe Lebanon: Containing Spillover Forward for EU Balkan Policy Nick Witney, November 2011 from Syria Heather Grabbe, Gerald Knaus and (ECFR/40) Julien Barnes-Dacey, September 2012 Daniel Korski, May 2010 (ECFR/21) (ECFR/61)

9 ABOUT ECFR

The European Council on Foreign Relations (ECFR) is the first pan-European think-tank. Launched in October 2007, its objective is to conduct research and promote informed debate across Europe on the development of coherent, effective and values-based European foreign policy.

ECFR has developed a strategy with three distinctive elements that define its activities:

•A pan-European Council. ECFR has brought together a distinguished Council of over one hundred Members - politicians, decision makers, thinkers and business people from the EU’s member states and candidate countries - which meets once a year as a full body. Through geographical and thematic task forces, members provide ECFR staff with advice and feedback on policy ideas and help with ECFR’s activities within their own countries. The Council is chaired by Martti Ahtisaari, Joschka Fischer and Mabel van Oranje.

• A physical presence in the main EU member states. ECFR, uniquely among European think-tanks, has offices in Berlin, London, Madrid, Paris, Rome, Sofia and Warsaw. In the future ECFR plans to open an office in Brussels. Our offices are platforms for research, debate, advocacy and communications.

• A distinctive research and policy development process. ECFR has brought together a team of distinguished researchers and practitioners from all over Europe to advance its objectives through innovative projects with a pan-European focus. ECFR’s activities include primary research, publication of policy reports, private meetings and public debates, ‘friends of ECFR’ gatherings in EU capitals and outreach to strategic media outlets.

ECFR is backed by the Soros Foundations Network, the Spanish foundation FRIDE (La Fundación para las Relaciones Internacionales y el Diálogo Exterior), the Bulgarian Communitas Foundation, the Italian UniCredit group, the Stiftung Mercator and Steven Heinz. ECFR works in partnership with other organisations but does not make grants to individuals or institutions. www.ecfr.eu

The European Council on Foreign Relations does not take collective positions. This paper, like all publications of the European Council on Foreign Relations, represents only the views of its authors.

Copyright of this publication is held by the European Council on Foreign Relations. You may not copy, reproduce, republish or circulate in any way the content from this publication except for your own personal and non-commercial use. Any other use requires the prior written permission of the European Council on Foreign Relations

© ECFR October 2012.

ISBN: 978-1-906538-64-4

Published by the European Council on Foreign Relations (ECFR), 35 Old Queen Street, London, SW1H 9JA, United Kingdom

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