Is the World's Biggest Economy in Danger of Disintegrating?

It is the world's biggest economy, China's largest export market and the top contributor to the International Monetary Fund (IMF).

And while its politicians and citizens may feel some sense of belonging to the European Union, the sovereign debt crisis has shown that when the going gets tough, few people identify with Europe.

European Union (EU) flags fly outside the the European Commission headquarters in Brussels.
European Union (EU) flags fly outside the the European Commission headquarters in Brussels.

Since the credit crunch hit, flaws in the European economic model have been exposed. Many countries in the region are now among the biggest beneficiaries of IMF funds, causing concern for investors on all continents.

Fifty five years after the signing of the Treaty of Rome which founded what is now the European Union, the EU finds itself at odds with the very countries that make it up: politicians increasingly put national interest and popularity at home first and blame the EU and the single currency - the euro - for most of their countries' economic troubles.

If that trend continues, analysts fear that the union that was built painstakingly over decades and brought peace and prosperity to the continent is in danger of disintegrating.

"Clearly I am very worried because the movement towards European cooperation or integration seems to have stalled at the moment and the aftermath of the euro crisis is going to make the movement towards disintegration more powerful," Stephen Tindale, Associate Fellow at the Centre for European Reform in London told

"There's a clear need for some imaginative and inspiring European political leadership and there's no obvious figure willing or able to play that role," Tindale added.

The current – and most of the aspiring – political leaders in Europe seem to be doing just the opposite. Nicolas Sarkozy, the conservative French president who is fighting for re-election, recently said that he was going to push for more trade protectionism in Europe and tighter external border controls.

His opponent, Socialist candidate Francois Hollande currently leading opinion polls, has promised to renegotiate the fiscal pact agreed last December, which ensures that countries in the EU take the issue of tackling their debt seriously.

Meanwhile far-right leader Marine Le Pen, currently third in the polls, is focusing her campaign on "economic patriotism," which she sees as "the only way to revive employment without the inhumane austerity measures” that other European countries have had to face.

Europeans Vs. Europeans

In other parts of the European Union, outbursts of anger from German politicians against Greeks and other southern Europeans are notorious, and earlier this week Spain's Prime Minister Mariano Rajoy called on other EU leaders to be more cautious when they talk about Spain, reminding them that "what is good for Spain is good for the euro zone."

In a recent article in the Financial Times, billionaire investor George Soros warned that the EU was unlikely to continue to exist unless extraordinary steps are taken to save it from the consequences of the debt crisis, after measures such as injecting more liquidity in the markets failed.

"Latin American countries suffered a lost decade after 1982, and Japan has been stagnating for a quarter of a century; both have survived. But the European Union is not a country and it is unlikely to survive. The deflationary debt trap threatens to destroy a still-incomplete political union," Soros wrote.

This is the union's main problem: the lack of a common political identity; and it cannot be solved overnight.

According to Tindale, there is no European political identity because the European Parliament – which is made of members elected by citizens in each country – does not have substantial political power and the European Commission – the executive body of the EU – is not an elected organization.

"The fact that there is no European political forum is, I think, a significant factor in the absence of an European identity," he said. "I think that moving towards electing the European Commission is a sensible route to go. That would require changing the Treaty and referendums in some countries."

The trend towards divergence, rather than convergence is not only visible in politics. In economics, too, more often than not national interests take precedence.

The German central bank, the Bundesbank, recently announced that it would reject bank bonds guaranteed by states that received aid from the EU and the IMF, after the European Central Bank gave national banks more flexibility on picking collateral. The Austrian central bank followed suit.

Worse Things to Come?

The amounts involved are small and unlikely to cause problems for the periphery countries, but analysts said they were watching to see if these moves signal that worse things are to come.

"If it is a sign of things to come, if it is a sign that the Bundesbank and other banks are going to demand more assurance on loans to Greece and other countries, then it is a very worrying sign," Jennifer McKeown, senior European economist at Capital Economics, told

"We've argued for some time now that the euro zone is likely to break up. Greece is likely to leave, possibly as soon as this year, and may be followed by Portugal, maybe by Ireland," McKeown added.

The periphery countries might be pushed out of the euro zone by their electorates, sick of the austerity measures that have plunged Greece, Spain and Portugal into deep recessions, or Germany might get tired of having to foot the biggest part of the bill for bailouts and get out, she said.

Since the beginning of the debt crisis, analysts have argued that European legislation does not allow a country to leave the euro zone and remain in the EU – the single currency was designed as a one-way street, to ensure its credibility.

But McKeown pointed out that the ECB was prohibited from printing money and it still did. Although the central bank insists that it is sterilizing the cash it injects in markets when it buys government bonds, it is difficult to check whether all the liquidity has been drained.

"They've managed to overcome the laws [in other situations]," she said. "I think the same thing might happen. There are ways that you can have a country leave the euro zone and stay in the European Union."

"If a country leaves the euro causing less disruption it is perhaps more feasible that it can stay in the EU," McKeown added.

Reform or Perish

Politicians' statements, as well as noises in the markets, do not mean all is lost for the EU, but the union must reform quickly or face disintegration, analysts said.

"The EU is not much threatened by rhetoric but by action or rather lack of action," Daniel Gros, director at the Centre for European Policy Studies in Brussels, told

"I would like to see in Spain recognition of the severity of problems in the housing market and liberalization of the labor market, and the same [liberalization of the labor market] in Italy," Gros added.


In northern Europe, people in Germany, the Netherlands, Sweden and Denmark and, in Central Europe, Austria, save too much and consumers in these countries should be encouraged to spend more, he said.

The French model, although it still has some life left in it, is not sustainable in the long term, Gros warned, adding: "You cannot live forever running a current deficit and consuming more than you produce."

For the EU to survive, "the current constellation of economic imbalances" must be fixed over the next decade, Gros said.

"The idea of having a unified economic government of the EU or of the euro zone is something that is 50 years away. We don't have that much time to get the euro situation under control," he added.

The next two to three years will be "very difficult" for the union, but over the longer term the perspectives are good because the EU will promote economic growth and play an important role in climate policy, which Europeans take more seriously than other parts of the world, Tindale said.

Europeans would accept the EU more readily if the European Commission were to be elected and isolationist mentalities would change through the creation of a sense of European identity, he added.

However, cultural issues will not change very quickly and "the idea that it's necessary to persuade people that they are European rather than French or German or British" is not a good one, according to Tindale.

"It's possible to be Californian and American; we have to move towards that. It's possible, but that will require greater political leadership," he said.