The special European Council of 11 February 2010 was intended originally to provide the heads of state and government with an opportunity to reflect on the longer term problems of the European economy and begin to define a strategy to cope with them. In fact it was totally overshadowed by the Greek crisis. Far from undermining Van Rompuy’s plans for the development of the European Council however, the crisis helped them significantly: firstly because it confronted the European Council with a major challenge which only the heads of state and government could resolve, and secondly because Van Rompuy himself emerged as the decisive player. Against the background of serious disagreement between Germany and Greece, it was Van Rompuy who brokered a solution which marks an important step forward in the development of economic government in the European Union and more particularly the euro area.

This note begins therefore with the Greek crisis. The fact that Greece finds itself in a precarious situation should have surprised nobody. As the figures cited in section 1 of this paper indicate, Greece’s divergence from the EU-German norm has been obvious throughout the country’s relatively brief history as a euro-area member. Greece’s crisis was therefore an accident waiting to happen. Once it happened, it was furthermore almost certain to have consequences for the euro area as a whole, partly because Greece is by no means the only country using the euro with high debt levels, but still more because of the distinctive character of Europe’s Monetary Union, which does not fit neatly with any preconceived notions of how a currency union should be constructed.

Although, as I argue in this paper and will even more systematically in the next one in this series, the improvements to the system that are required are far reaching, the claims of those like Otmar Issing and Paul Krugman – to mention only the quality end of the market – that Monetary Union without Political Union cannot work should be treated with a certain reserve, not because the basic thesis is wrong, but because Political Union can take different forms. The debate about the Greek crisis has provided numerous illustrations of the tendency of economists and market operators to underestimate the degree of political integration that has already been achieved within the EU and the potential for further development that still exists. Comparisons with ill-fated currency unions of the past for example are highly misleading. The present political and economic underpinnings of the euro area are much more complex and powerful than the loose ties that bound France, Belgium, Italy, Spain, Switzerland and others together in the Latin Monetary Union of the 19th century. The current structures may still be a work in progress. They are also however sui generis. Paul Krugman’s claim that ‘European states need to function more like American states’ is therefore totally irrelevant and has more in common with Professor Higgins’ outburst – ‘why can’t a woman be like a man?’ – than it does with serious analysis.

The Greek crisis does, nevertheless, raise systemic issues of the utmost importance and the response which Van Rompuy played the leading role in fashioning on 10-11 February was therefore of much more than ephemeral significance. As the second section of the paper argues, it also helps to explain why the discussion of general economic policy issues, which the heads of state and government had subsequently over lunch, went very much as the president of the European Council wanted. Van Rompuy did not need to argue the case for more effective economic government in the European Union when the enemy was at the gates. As long as it was serious and à 27, and not a plaything of the French president à 16, even Angela Merkel was ready to use the dreaded words. Quite what she and indeed anybody else who was present mean by the term is still far from clear. What is important in present circumstances is, however, that Van Rompuy received a virtual carte blanche to develop the ‘seven-step’ strategy which he had sketched out in a paper that he circulated to his colleagues on 8 February.

by Peter Ludlow. To obtain the whole report contact him directly: eurocomment@parnassus.pt