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September Is the Cruelest Month

Welcome back from summer holiday, Europeans! Get ready for 30 days that will determine the fate of your continent.

When German travelers return from their hallowed August vacations this week, they will find that the euro is gone -- at least as far as Frankfurt airport is concerned. Without much fanfare, the massive euro sculpture, a fixture at Germany's largest airport since 2001, was unceremoniously dispatched in the dead of night to make room for an inter-terminal railway. The sculpture's unloved twin, which is famously perched in front of the European Central Bank (ECB) in the heart of Frankfurt, has become the symbol of the eurozone crisis (and a favorite of wire service photographers) and may suffer a similar fate. When the bank moves to the east end of the city in 2014, some urban planners are lustily planning the sculpture's removal from public view. Symbols are inexorably tethered to politics, and this one is a doozy.

But in the coming month, anxiety-ridden policymakers struggling to maintain the euro will face a series of threats that are anything but symbolic. September will witness a political big bang that ushers in another existential crisis, and failure on any single issue could wreck the European currency. Over the next month, four potential crisis points constitute a political cliff for Europe that will be key to determining if the eurozone has a future.

First, on Sept. 12, Germany's constitutional court is set to rule on the constitutionality of participating in the European Stability Mechanism (ESM), an institution that was envisioned as the permanent facility for pooled sovereign lending to debt-strapped European countries. The ESM, which passed the Bundestag comfortably (493 votes to 106) in June, would have autonomous control over German public funds -- and therein lies the legal problem. The German constitutional court sees itself as the guardian of a certain idea of Germany -- small, stability-minded, and inwardly oriented -- and court watchers expect a "yes, but..." ruling that stipulates that the red lines of German democracy have been reached. Any further moves to integrate crisis management at the eurozone level -- and there will inevitably be more -- will necessitate a referendum, the first in Germany's post-war history. Already the debate around a possible constitution-altering plebiscite is driving the political narrative.

The second crisis point is the upcoming assessment of Greece's progress in fulfilling the terms of its loan conditions by the troika of the ECB, the European Commission, and the International Monetary Fund (IMF), expected in late September or early October. Greek Prime Minister Antonis Samaras is already trundling between Berlin and Paris in an attempt to prepare eurozone leaders for a disappointing report. Athens' hope for extending its repayment schedule has sparked heated debate in Germany, where exasperated rhetoric on the political right about the inability of Greece to meet its commitments has become more vociferous. Grandstanding in the Bundestag in the wake of the troika report is likely, especially from the arch-conservative Bavarian Christian Social Union (CSU) and the business-minded Free Democratic Party (FDP). Germany's paper of record, Der Spiegel, called in May for Greek's exit from the euro, citing its unwillingness to undertake structural and labor-market reforms.

For ultra-cautious German Chancellor Angela Merkel, the unintended, potentially devastating second and third order consequences of the "Grexit" are anathema. She is a politician who prizes the maintenance of the status quo above all else and fears the unpredictable effects on Spain, Italy, and France, among other countries. A Grexit would eliminate all credibility that the eurozone has left as an insoluble currency union. This could lead to massive speculation and capital flight on an unprecedented scale from countries seen as next in line to go. While German banks have limited but important exposure to Greek debt, they have much more exposure to other countries of the eurozone's south and a need for these markets as consumers for German exports. The effects would tear through the German economy. It is this worry, not a vague sense of European solidarity, that drives the chancellor to hold firm on Greek membership in the eurozone amid the siren calls from her backbench to kick Greece out.

Which brings us to the third element in the eurozone crisis saga -- the Dutch elections, also scheduled for Sept. 12. The Netherlands is one of the small economic powerhouses that has aligned itself with Germany -- tough-minded but traditionally somewhat pro-European. This summer, prominent Dutch politician Bas Eickhout excoriated a group of American commentators for focusing on Germany when lamenting the eurozone's future, when they should focus more on the Dutch and the Finns. His criticism is justified -- both countries are seen as losing their resolve to contribute to the financial lifelines for more bailouts beyond current commitments and the Dutch elections are expected to serve as a release valve for voters' frustration with regarding the eurozone crisis management.

The Netherlands and Finland have not enjoyed the same economic boomlet that Germany had experienced until recently. The Dutch economy shrunk by almost 1.5 percent in the first half of 2012, and Moody's added a negative outlook to the country's prized AAA rating due to the weakening economy. This economic stagnation has bolstered the country's political fringe: The far-left Socialist Party (SP), which is currently leading in the polls, says it would flout EU budgetary rules, call for a referendum on the recently signed EU Fiscal Pact, oppose rescue packages for Greece, and roll back the "Berlin Consensus" economic policy built on hard money, tight fiscal controls, and structural reform. Euroskeptic Geert Wilders' Freedom Party (PVV) will also play a pivotal role in the election's outcome: The famously anti-Muslim politician was in an informal alliance with the center-right until recently and brought down the countries' last government over opposition to EU imposed austerity requirements. His party is also expected to get a substantial share of the national vote.  

The Netherlands' atomized politics reflects a wider ungovernability sweeping Europe. Here, as in Finland, the Euroskeptic fringe is squeezing out the pro-European center. The Dutch elections could add a new actor to the already unwieldy pantheon of potential spoiler governments.

Amidst all this chaos, the fourth and final crisis may be sparked by attempts to draw EU countries closer together. On September 11, the European Commission is expected to present a blueprint a for banking union -- a logical extension of EU's single market. Such a union should create depositor guarantees across the eurozone, guarantee muscular pre-emptive supervision across borders, and establish re-capitalization and wind-down plans for troubled banks that ensure consistency in case of a systemically important bank failure. It would also sever the link between banking and sovereign debt woes. In short, such a scheme is intended to free Europeans from a vicious cycle in which a collapse of a major national bank in a country such as Spain will inevitability lead to the total collapse of Spain's public finances.

These would be necessary and straightforward reforms in a political vacuum. But the EU is anything but a politics-free zone. A banking union will work only if European member states are willing to cover depositors in neighboring states and provide European institutions with tools, such as taxation, that allow reserves to be accumulated in order to shore up weak banks. Since negotiations on such a union will be awash in parochial politics, Euro-watchers should expect decisions that will limit ability of the EU to override national authorities in countries such as Spain and France. Talks are also probable on a limited role for any fiscal pooling that could create a eurozone-wide deposit insurance designed to mitigate the risk of exit from the currency union.

These are just the latest sagas in the ongoing eurozone crisis. In the absence of strong institutions, clearly defined decision-making processes, and a pan-European political culture, the EU has created a snowballing political and economic crisis. The odd reality is that the world economy is now held hostage by such minor political dramas as votes in the Slovak parliament, bilateral collateral negotiations between Finland and Greece, and the ominous statements by former Italian Prime Minister Silvio Berlusconi. This is the height of indulgence, and a reflection of a saturated political environment that is drowning Europe. All of this is having a corrosive effects on European society -- which, if policymakers aren't careful, may turn out to be the euro's ultimate legacy.

DANIEL ROLAND/AFP/GettyImages

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