Europe has dug itself into a hole – and it just can’t stop digging

Europe has a “sea of troubles”. There is the debt crisis, the inability to buttress the weak banking system and the failure to deal with issues like bad loans, which now total around €1.2 trillion (£930bn). And beyond financial matters, of course, there is the refugee crisis. Each issue has harmed the “European Project”.

The problem is not that the eurozone faces serious economic challenges. The issue is its failure to anticipate the risk of such a crisis ever happening, the lack of contingency planning and its inability to deal with the problem in a timely way.

European policymakers have proved indecisive and divided. They cannot decide whether they want a united states of Europe or not, and complicating matters are unstable governments in Greece, Portugal and Spain and upcoming elections in Ireland, Germany and France. Relations between various leaders are increasing frayed. The Brexit and Fixit (in Finland) debates highlight the stress.

The debt crisis is now more than five years old with no sign of a solution. As the woes of Greece indicate, there are only unpalatable choices. Minor concessions will not solve the problem.

Some time this year – possibly as early as April or May – the Greek debt crisis may flare up again when lenders assess progress. An unsatisfactory review will trigger demand for new austerity measures, while favourable treatment for the Greek government risks opening a Pandora’s box of demands from other countries to relax budget-deficit and debt targets.

A writedown of debt would crystallise losses. It might threaten the governments of Spain, Portugal, Italy, Finland, the Netherlands and Germany.

If Greece leaves the euro, the consequences for the eurozone are unclear. Should Greece prosper outside the single currency, as the economist Paul Krugman has pointed out, it would reduce the attraction of the eurozone for weaker members.

Over time, the European debt problems will spread to other countries beyond the periphery – to core principals such as France.

The approach of the European Union has undermined the European project. Big countries like Germany have reacted to the inability to resolve the crisis by resorting to economic and political repression, including tighter supervision of national budgets.

Believing that Greece would not willingly leave the euro, the EU rejected compromise. Instead it placed pressure, with the co-operation of the European Central Bank, on the Greek government.

The EU has also using its negotiations with Greece to make an example of the country, in order to discourage similar problems with potential future governments in Spain and Portugal that might want to retreat from austerity.

The EU failed to recognise that its actions may destabilise Europe in unexpected ways. The Greeks’ dalliance with Russia has the potential to undermine Western security, creating a large corridor of vulnerability through the Balkans, the Levant, the Middle East and Caucasus. While a member of the EU, Greece can veto sanctions, reducing European power. An embittered Greece, hostile to European partners and NATO, has caused alarm in the US.

At a deeper level, the EU’s actions are promoting political radicalisation on both the political right and left with unknown consequences.

The real damage is subtler, as the true face of the European project, and European leaders and elites, is exposed. In November 1990 Margaret Thatcher, responding to a question of European monetary union, anticipated the present situation presciently: “It’s all politics. Who controls interest rates is political. A single currency is about the politics of Europe.”

Within the EU, there is also increasing discomfort over the role of Germany.

In the German novel Doctor Faustus, written by Thomas Mann, Saul Fitelberg is an impresario who tempts the composer Adrian Leverkühn to sell his soul. He observes: “The Germans, with their nationalism, their arrogance, their fondness for their own incomparability, their hatred of being second of even place on a par, their refusal to be introduced to the world and to join its society – the Germans will bring about their own misfortune.”

Satyajit Das is a former banker and author whose latest book, ‘A Banquet of Consequences’, will be released internationally in April