Many people see reasons for optimism in Europe this year, citing signs of an economic recovery or noting improvement by some financial measures of European Union (EU) “integration.” For such observers, there is hope that the European Parliament elections between May 22-25 will bring a new and constructive cycle of pro-EU policy.

Ongoing and Unfinished Project

It is understood that integration of the EU is an ongoing and unfinished project — a process that has been driven by the pro-EU political will of member states to bring peace and prosperity to the political and economic union.

The recent era of EU integration, the European Monetary Union, has its foundation in the 1992 Maastricht Treaty — an agreement between the EU leaders of the day which expressed the economic goals that aspiring member states would need to attain in order to adopt the common euro currency. The economic goals, “euro convergence criteria,” were meant to control inflation and assure fiscal discipline in the new union of diverse member states, and were expressed in terms of debt, deficit and ten-year bond yields.

Unemployment rates do not measure the loss of productive capacity of the many people who are leaving the country to seek employment outside the EU, nor the potentially “lost generation” of undereducated and unemployed youth.

From 1992 to 1999, pro-EU sentiment was high, a function of the optimism that joining the euro would bring greater prosperity to each member country, given the efficiencies of trade, free-flow of labor and political clout of being part of the first tier of Europe. There was also fear of being left out of the euro, which fueled a high degree of both nationalism and pro-EU political will to join the euro club.

Economic Diversity

At the introduction of the euro currency in 1999, there was also the expectation that a “real” convergence of underlying country economies would follow. The hope was that lower interest rates and capital flows into poorer countries would foster investment, and that true EU integration would evolve over the years, resulting in improved productivity and competitiveness for each member state economy. The entire EU region as a whole was expected to benefit politically and economically.

Investor optimism and fear of missing the investment opportunity propelled capital flows from around the world into the bond markets of all aspiring member states, the peripheral countries or high yielders. Ten-year bond yields converged to near equal levels, allowing peripheral countries to fulfill Maastricht bond yield “convergence criteria.” Investors ignored the risks associated with the economic diversity of the aspiring member states, as optimism of the coming euro-era outweighed the underlying political and economic risks of the day.

The reality of the eurozone has differed from expectations. What has evolved over the last 20 years or so is a natural divergence between the fundamentally weaker and stronger economies, particularly since the onset of the global financial crisis five years ago. Political will rather than true convergence in competitiveness between member countries has kept the EU together. But the pro-EU political will required to finish the integration process has been lacking since the onset of the global financial crisis, leaving fiscal union, true banking union and mutualized debt undone, or left to debate.

Time is not on the side of EU policymakers. The current lack of pro-EU political will has resulted in policies that seem neither to measure, nor support full EU integration. In fact, the opposite seems true: Exacerbated by EU policy prescriptions of austerity and cost-containment required by the Maastricht Treaty, member states are in the process of what this author has referred to as “” — a stagnation or even reversal of the integration process in important ways that are not measured by the Maastricht Treaty convergence criteria. The current trends in the EU are that member states are diverging economically, politically and socially in measurable and immeasurable ways.

Political Blocs

The eurozone crisis is one of relative competitiveness within Europe. The EU is in the process of de-converging by measures based on the realities of its diverse EU members, roughly divided now between “periphery” and “core” countries. The pro-EU political will is neither evident, nor able to alter the process of disintegration.

Yet the global era is one of regional political and economic blocs. As the Ukrainian crisis highlights, the EU is a political bloc. The future of the EU and the eurozone are inextricably linked and both are certain to enlarge for political reasons, in spite of their political and economic problems. While joining is difficult, leaving is virtually impossible.

For 2014, the current fear is not that the eurozone will break apart or lose members, but whether EU member countries have disintegrated — de-converging to a degree that even a renewal of pro-EU political will cannot mend.

If the EU is really meant to progress on the path of integration, a pro-EU political will that is capable of forging and implementing a new and coherent policy must emerge. Can the political will to finish the EU integration project emerge from the European Parliament elections, however? Most likely not.

European Elections

Current polls indicate that the elections are certain to see euro-skeptic and anti-EU parties winning seats in the new parliament. These parties will find their voice and express their opinions, which will bring broader discussion to EU policymaking, beyond the austerity versus economic growth and investment debate. However, it will not necessarily be a constructive discussion in the formation of new EU policy, as voices against further integration are certain to result in dilution and fragmentation of the political will to create pro-EU policy.

As a consequence, the European Parliament elections will likely add another layer of dysfunction to political processes in the implementation of new policy initiatives. A continuation of the current, austerity-focused EU policy will continue as a strategy to minimize the costs of keeping the eurozone together for the wealthier core countries. However, it will also create continued and progressive instability for EU cohesion because the existing trends of disintegration will stay in place.

National governments will continue to negotiate for leniency on Maastricht criteria and question its assumptions, more fervently still as the scope of EU parliamentary debate broadens.Unfortunately, however, the trends indicate that the worst may not be over, but yet to come for EU integration.

Copyright © Shutterstock. All Rights Reserved

Core and Periphery

There is no reason to expect the core and peripheral countries to have a different relationship than they do now, with the politically strong versus the politically weak, creditors versus debtors, and apparent winners versus losers in EU integration. The European crisis is one of relative competitiveness and the trade and current account deficits reflect that. Weaker countries will continue to run account deficits and trade deficits with Germany.

The weaker countries will be forced to adjust, as they have, and as painful as it may be for them to continue to do so, they will most likely suffer painful wage deflation and increasing income inequality and have growing structural unemployment. There is no export panacea to stimulate growth, as the value of the euro subsidizes stronger countries that should have a stronger currency, while penalizing weaker countries that should have a weaker currency.

There may be signs of economic recovery in growth rates but, without job creation, there will be no real and integrated economic recovery for the EU. Weaker countries have a larger portion of unemployed that will likely not participate in the current economic recovery at all, as theirs is a problem of structural unemployment — workers who have lost their jobs in construction, for example, are unlikely to have the skills to work in the growing technology sector.

It is worthy of note that economic growth is essentially driven by productivity and demographics. But unemployment rates do not measure the loss of productive capacity of the many people who are leaving the country to seek employment outside the EU, nor the potentially “lost generation” of undereducated and unemployed youth.

These entrenched trends arenow inherent to the structure of the eurozone itself, as they are the result of an ongoing relationship between stronger and weaker member states locked together by the common currency, and exacerbated by the global financial crisis and austerity measures imposed.

EU integration is an ongoing and unfinished project, and the Maastricht Treaty does not provide a comprehensive framework to measure EU integration, nor was it meant to. As long as the natural dissimilarities between member states go unmeasured by Maastricht criteria and are not managed by EU policy, they will continue to further erode EU integration over time — economically, politically and socially.

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

/ /

The post European Union 2014: Another Chapter in the “Disintegration” of the EU? appeared first on 51�Թ�.

In my view, the European Union’s (EU) rescue of Cyprus will be seen as a milestone event, and will have a lasting impact on the EU’s ability to manage the process of European integration and the future integrity of the euro zone for key reasons.

Loss of Credibility

The EU leadership has suffered another loss of credibility. The fragility of the Cypriot banking system was a surprise to no one. The potential financial rescue of Cyprus was on the EU agenda for months as Cypriot banks remained fragile since the write-down on the value of neighboring Greece’s sovereign debt, having . However, when it finally came to negotiating an agreement on the Cypriot “bail out” deal, the EU process became a last minute exercise in brinkmanship between EU finance ministers, the European Central Bank, and the Cypriot Parliament. Consistent with past behavior, EU leadership also showed a lack of foresight and sensitivity to potential financial market reactions to their policy actions and words. It was a missed opportunity to show proactive EU management of another chapter of the debt crisis, one that doesn’t instill confidence that EU leadership is capable of keeping the euro zone together.

The "political will" of the EU fragmented further. The EU is a political union to create peaceful economic prosperity through a unified political will to overcome diverse interests, as it has been since its post-WWII inception. The Cyprus rescue illustrates the degree to which the EU political will is again fragmented, and that the euro debt crisis isn’t over. Over the course of the last year, German Chancellor Angela Merkel had demonstrated pragmatic leadership by balancing the policy objectives of her German constituency to curtail financial transfers to debt-burdened “peripheral” member states, while also being . In the Cyprus rescue, however, she seems to be now siding fully in sympathy with her “bail out”-weary German constituency, certainly in anticipation of upcoming national elections. Chancellor Merkel and other EU leaders will find it increasingly difficult to formulate balanced policy as political extremism consolidates between those who refuse to "bail out" the periphery, and the periphery that wants no part of the "bail out" medicine of austerity measures. The deep-set trends of social and political fragmentation will continue, and are at the root of the EU's policy departures in Cyprus.

“Whatever it takes”

The European Central Bank will not do “whatever it takes” to keep the euro zone intact. While ECB President Mario Draghi has gone above and beyond what most expected of him to keep the euro zone together, he will not use ECB policy mandate to do “whatever it takes” to protect it. He certainly will not protect insolvent banks, nor should he. Though he criticized the EU’s bailout plan, he also faulted Cyprus and emerged as taking a hardline stance in negotiating the terms for Cypriot banks. The chairman of the Bank of Cyprus, Andreas Artemis, quit following the negotiations, complaining he was ignored during the regarding the future of the bank.

The important thing to remember is that Cyprus is not “unique” and its “bail out” has policy implications for the future. In spite of the country’s unique “business model” of relying on financing from large depositors from the former Soviet Union, Cyprus is not an isolated case. Each EU country on the list of “peripheral” nations that has unsustainable debt is unique in its own way, each due to an excessive practice of its own. As a consequence, policy emerging from the Cyprus “bail out” is relevant to future potential rescues. EU leadership has already stated that the Cypriot bail out may become a , a public knowledge that can create a contagion of the worst type: fear. With the confiscation of deposits as a potential new policy tool, the EU can expect money from individuals and corporations to flee banks in countries that are candidates for EU “bail out” assistance over time.

Geopolitical Tensions

There has always been a foreign policy component to economic blocks, as there has been throughout the history of the EU. In the current era, foreign policy aspects of the EU are less accentuated, particularly the East-West relations. However, Chancellor Merkel expressed concern when Cypriot authorities, who upon initially saying “no” to the rescue plan, sought financial aid outside of the EU, from Moscow. Cypriot Finance Minister Michalis Sarris flew to Russia to seek a deal, but returned to Cyprus rebuffed by Moscow and unable to secure financial support. Chancellor Merkel expressed irritation at the absence of Cyprus authorities as the deadline approached.

It is easy to speculate that Cyprus could eventually exit the euro zone in spite of the current “bail out.” Cyprus already faces deteriorating economic conditions and a devastated banking system. The country will face the lasting political and social repercussions of bearing the costs of austerity and prolonged recession that staying in the euro zone will require of the Cypriot population. If Cyprus were to exit, in itself a very costly alternative even if negotiated with the Troika, the country could again look to Moscow for financial support, thereby creating geopolitical tensions within the EU.

Looking forward, Eastern European countries that are prospective euro zone members may question joining the euro zone. Polish Prime Minister Tusk is , an economic powerhouse, on joining the euro zone as he likely ponders the benefits and costs of doing so. There are, however, more benefits to joining the EU than not and it is likely that Poland would eventually choose to join even if the popular vote were against it.

But investor sentiment in EU policy is damaged: it is common knowledge that investor confidence is a critical factor in successful European integration and that no Euro country can manage its financial markets, nor hope to meet the financial convergence criteria (that qualifies to maintain a Euro membership) without favorable investor sentiment and the resulting inflow of investor capital. Unsettling to investors is the unprecedented measure of introducing capital controls to restrict capital flight from Cyprus. The measure also technically creates a second Euro currency, one that has restrictions in Cyprus, and one that does not in other member states.

Disintegration of the Euro Zone?

Against the backdrop of the well-understood structural problems in the euro zone, the headwinds of bail out fatigue, a European recession, social unrest, and euro-pessimism, integration remains particularly vulnerable to political mismanagement. The EU decisions on the Cypriot “bail out” plan is one such milestone case of mismanagement as it has already contributed to financial loss, further investor anxiety, social unrest, capital flight, currency controls, nationalism, and further disruptions, to name but a few measurable and immeasurable impediments to further euro zone integration. The policy effects on Cyprus are just beginning. The implementation of the “bail out” policy will also have lasting effects, as Cyprus is likely to face a severe recession, teeter on the cusp a euro zone exit, and remain as the top candidate for a euro zone departure in the years to come.

The views expressed in this article are the author's own and do not necessarily reflect 51�Թ�’s editorial policy.

Image: Copyright © All Rights Reserved.

The post Cyprus: Another Chapter in the Disintegration of the Euro Zone? appeared first on 51�Թ�.