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As Europe’s financial crisis goes from acute to chronic, the dispute over who will bear the costs of resolving it is fueling the emergence of a new generation of political movements. In the so-called periphery, political upstarts promise citizens an alternative to austerity. In the eurozone’s “core” countries, they purport to protect taxpayers from relentless demands for debtor-country relief. How Europe’s leaders respond to these new political challengers will determine whether the monetary union stabilizes or fractures.

Europe’s political elite have, for the most part, been strongly integrationist. Given that they are largely of the post-World War II generation, they are acutely aware of the benefits of a peaceful Europe. In the 1990’s, differing visions of European integration led to a problematic compromise. In order to secure France’s backing for German reunification, Germany agreed to create a monetary union – but not a fiscal union. Now, Europe is suffering the consequences of that Faustian bargain.

At the same time, Europe’s leaders are under pressure from a new generation of voters, who grew up in the shadow of the Berlin Wall’s collapse. The lifting of the Iron Curtain gave the West access to a vast supply of cheap labor in Eastern Europe. China’s subsequent emergence expanded that supply further, culminating with China’s entry into the World Trade Organization in 2001. As a result, many of Europe’s economies began to fall behind.

European leaders hoped that a monetary union would help Europe’s less competitive economies catch up to the richer countries of the north. And, during its first decade, the euro ostensibly delivered. Just as cheap mortgage financing papered over the cracks of growing income inequality in the United States, cheap capital from the north accelerated Europe’s apparent economic convergence.

The post-Wall generation seemed to have all the luck – at least for a while. But income inequality was worsening steadily in all member countries, with more highly educated citizens benefiting from the booming services industry, while the less educated suffered as manufacturing moved to cheaper locations. Then, the global financial crisis struck, income inequality rose sharply, and the post-Wall generation in southern Europe suffered the largest drop in living standards since WWII.

Unlike the US, which was founded on a political cause – opposition to British colonialism – that forged a common national identity, countries joining the European Union sought simply to avoid further warfare on the continent. While laudable, this cause was inadequate to foster a shared European identity. On the contrary, it allowed national identity to flourish.

The post-Wall generation, whose members are less than 40 years old and thus far removed from WWII, has little appreciation for this cause. For them, debtor and creditor countries’ increasingly divergent economic objectives are much more meaningful.

Citizens of debtor economies, who grew up complacent about economic convergence, have lost their savings and, in many cases, have run out of hope. Meanwhile, citizens of creditor countries are focused on protecting the gains made before the crisis; after all, it was their savings that financed their neighbors’ reckless spending.

Throughout the eurozone, rising income inequality has created an underclass that is increasingly suspicious of the monetary union. As the post-war generation ages – with most of its members now at least 60 years old and its leaders either in senior leadership positions or acting as senior statesmen – the remaining support for integration is waning.

Many post-Wall voters stand on the margins of established parties or are forming parties of their own, while a more pragmatic group is being pulled between the old order and new movements. The muddled, reactive response to the euro crisis reflects the compromises that traditional political parties have made in order to remain in power as generational differences have become increasingly extreme.

Political revolutions rarely arise out of brief periods of acute crisis. Rather, they follow one or more generations of chronic decline, when fear of economic loss gives way to targeted anger, and charismatic voices surface to orchestrate the response. This pattern has recurred throughout history, from the French Revolution all the way to the fall of the Berlin Wall. Although markets may have been cowed into submission for now, the cracks in the eurozone’s political foundations are beginning to show.

For now, the post-Wall generation lacks a clear focus for its anger. New populist parties in Italy, Greece, and Germany reflect the direction in which politics is moving, not the final destination. Their ability to win support from both the left and the right suggests a shared aspiration to rebuild the protective national barriers that the post-War generation demolished.

Against this background, most European leaders are afraid that their electorates will reject anything that seems to imply more integration. It is a classic prisoner’s dilemma: all countries are better off if they contribute to a common cause, but the pressure of national elections impedes politicians’ ability to champion that cause. The ultimate test of leadership will be a commitment to EU treaty reform, with all the thorny negotiations and referenda that this entails.

The post-war generation’s political leaders must respond promptly and effectively to the challenge posed by emerging political movements while they are still immature. If they wait too long, the old walls will be restored and the euro’s guardians will be left out in the cold.

Gene Frieda - Global Strategist for Moore Europe Capital Management
(Project Syndicate)

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