By Timothy Heritage - Analysis
BRUSSELS (Reuters) - Greece’s request for aid from the European Union and IMF on Friday is an unprecedented step for the EU which many economists hope will herald the start of closer economic and political cooperation in Europe.
But just securing agreement on the aid has revealed cracks in EU unity and although reform of the euro zone now seems inevitable, there is no guarantee member states will agree on the far-reaching changes that many economists say are needed.
“The crisis is going to prove a turning point because what is happening is an acceleration of trends that were already there (toward stronger cooperation),” said Andre Sapir, professor of economics at Universite Libre de Bruxelles.
But he added: “We have a serious problem of leadership in the European Union. The problems are very big but we don’t have the leaders to deal with them.”
Preventing a Greek default is an important test for the 16 countries that use the euro as they try to maintain confidence in the single currency and prevent similar problems spreading to other members of the group.
The crisis has forced the 27-country EU to consider ways to deepen political and economic coordination and take actions that seemed unlikely just weeks ago, such as asking the International Monetary Fund for help and rescuing a member of the euro zone.
The EU’s commitment to carrying out reforms will soon be tested as the European Commission sets out its plans to avoid any repeat of the Greek debt crisis.
The EU executive will unveil proposals on May 12 to give more teeth to repeatedly breached rules on budget discipline, increase economic surveillance across the bloc and create what it calls a permanent crisis-resolution mechanism.
“The latest developments in the European economic area, not least around Greece, have shown a pressing ... need to reinforce policy coordination in the euro area and in the European Union as well,” European Economic and Monetary Affairs Commissioner Olli Rehn told a news conference on April 14.
The backing of France and Germany, the EU’s traditional “motor,” will be vital for such moves, as it is for any important initiative in the Union.
Chancellor Angela Merkel and President Nicolas Sarkozy agreed on the need for closer economic cooperation at talks on February 4 but have different visions of the euro zone and it is far from certain their views will be reconciled.
An agreement between Germany and France on March 25, in which Sarkozy dropped his opposition to an IMF role, paved the way for the euro zone aid package on Greece.
But the choice of words in a statement outlining the agreement highlighted their lingering differences over the important issue of economic governance -- central economic planning which is resisted by Germany.
The French text referred to “economic government” and the German text referred to “steering”
“Is there now going to be a big breakthrough on economic governance? If you ask in Paris they will say ‘Yes, this is the time now’. If you ask in Berlin, they will say ‘No way’,” said Hans Martens, head of the European Policy Center think tank.
“This is the stumbling block. Economic governance is not just a question of putting together resources for a financial rescue. It’s about managing fiscal policy together. I don’t think it will happen, especially not without a treaty change and how would a treaty change be voted through now?”
Investors fear any significant changes in the way the euro zone operates could require treaty changes for which no one has any appetite after the long struggle to secure each EU state’s approval of the Lisbon treaty reforming EU institutions.
They also remain unconvinced about the euro zone’s ability to sort out its own problems, especially as it has had to turn to the IMF for help.
Given the problems the EU and euro zone have had until now securing the agreement of all member states to handle crises, hopes of quick progress now on reinforcing the euro zone are limited.
“There’s a limit to the things we can do,” said Daniel Gros of the Center for European Policy Studies think tank, underlining the need to move fast. “We do not have two years to wait. We have to decide now.”
Editing by Janet Lawrence