WEALTH OF NATIONS
Europe's Crisis Is Political
German politics is now the crucible in which the future of the E.U. will be formed.
The remarkable thing about the European Union is how far this project has come without its partners ever deciding what it was for -- or, more precisely, where it would stop. The crisis now facing the E.U. demands answers to those questions. But this is not the first time that circumstances have demanded such answers. The European way is not to provide them -- which would be hard -- but to keep on muddling through.
It has always worked before. As I say, the Union has come this far, and it has been a stunning achievement. Governments will doubtless try the same approach once more. This time, though, I wonder if they will finally hit the wall.
Some history: In the beginning, cooperation among European governments was about avoiding the next war, a goal that all could embrace. Economic integration would cement peaceful interaction on a continent hitherto ravaged by conflict. And it worked. Something like an economic miracle did come to pass in Europe after 1945. Flattened economies were rebuilt. It was done with generous economic assistance from the United States, which by then understood how much it had at stake in European peace. Nonetheless, the economic resurgence in France, Germany, Italy, and the other nations was mostly homegrown. They transformed themselves; became modern, thriving economies; and deepened their friendship.
From the start, some of Europe's postwar visionaries entertained bigger ambitions. Europe should eventually unite politically, they believed, partly to ensure that its armies would never again come to blows but also to achieve larger purposes. A united Europe could be a force for good in the world, and a more powerful defender of its own interests. A Europe of separate nations, even if at peace and thriving in economic terms, could not take its place on the world stage alongside the United States and the Soviet Union.
This vision infused the project. The treaties creating, extending, and deepening the E.U.'s common economic space formally embraced the idea of "ever-closer union." Yet the pros and cons of political integration were never much discussed, least of all with voters. Quite what "Europe" meant was never much talked about, either. In the beginning, the European Coal and Steel Community had six members; the European Union now has 27 (located "primarily in Europe," as Wikipedia notes). Other nations are in the queue for membership. In some ways, the process became the purpose. The Union had to keep growing; it had to keep deepening. The momentum was the point.
As in many a romance, the partners wanted different things, and these differences were never resolved so much as shelved. At occasional moments of crisis, commitments were deepened: It was that or drift apart. Get engaged, if I may stretch the metaphor; get married; have a baby. Either that or think hard about whether you really belong together.
Of course, sometimes it works. Having different goals is not necessarily a problem; they're not always incompatible. So it proved in Europe. The critical partnership was, and remains, France and Germany. Both wanted peace, but beyond that they diverged. France wanted global standing, and saw Europe as a way to get it. Germany wanted to bury its guilt over the war, to curb and diminish itself in a larger entity. Different aims, but quite compatible.
As the Union broadened, potential members had different priorities again. Mainly, they saw a chance to boost growth. The E.U. was a thriving market. Neighbors denied free access were disadvantaged. Eventually, with the creation of a semifixed exchange rate and then a common currency, the euro zone also offered a credible, centrally run, noninflationary monetary policy -- and with that the possibility of expanded capital inflows. These purposes had nothing to do with French grandiosity or German shame, but again it did not matter. That the Union offered different inducements to its ever-expanding list of participants was a strength, not a weakness.
The fatal flaw -- the underlying incompatibility, as it were -- was not that Europe's governments wanted different things but that Europe's governments were increasingly out of touch with their own voters.
Ever-deeper economic union seemed to demand ever-deeper political union. There was an undeniable logic to that. It is one of the few things that Euro-visionaries (who wanted political union) and Euro-skeptics (who did not) have always agreed on.
Common rules were needed to grease the wheels of economic integration; European executive bodies were needed to frame and implement them. An elected body, the European Parliament, would hold those agencies accountable. To speed and empower this process, there would be European law. Its writ would run in member states without further action by national governments. Europe would have its own Supreme Court. The E.U. already had a de facto constitution: the bundled treaties that moved this project forward down the years. Next it would get the real thing, an actual constitution to tell governments and citizens of the union where they stood.
But that was a problem. When this codifying document was put to referendums (in countries whose governments thought they could risk it), voters in France and the Netherlands said no. Rather than stepping back, the Union's governments recast the proposal as an unintelligibly complex revision of the treaties. When this stealth constitution was put to voters in Ireland -- a country that had gained a lot from E.U. membership and seemed certain to support further political integration -- they rejected it too.
Meanwhile, monetary union -- the creation of the euro -- had been another momentous development. It was a remarkably bold act of political and economic deepening at one and the same time. But for many of Europe's voters, it was another step too far.
Tellingly, German voters were mostly against it. Their country was pivotal. Without its backing, the euro would not have happened.
Mindful of the role of hyperinflation in bringing Hitler to power, Germans' proudest postwar achievement was monetary stability under the rigorous rule of the Bundesbank, the country's central bank. They were devoted to the mighty deutsche mark, Europe's strongest and safest currency. And here was their government proposing to abolish it, by folding it into a new European currency. They were offered some assurances: The new European Central Bank would be independent of national governments. It would be run with German rectitude. It would be based in Frankfurt. Still, they did not like it.
When Europeans talk of the "democratic deficit," they mean the literal and metaphorical distance between their national capitals and Brussels, which houses the European Parliament and Commission, the E.U.'s executive branch. This is an issue, to be sure. Europe's voters have little sense of holding the Union's politicians and civil servants accountable. Their laws descend from on high, and voters seem to have no say.
But the bigger democratic deficit is at the national level. Germany's abandonment of the deutsche mark bears witness to a profound disconnect between its leaders and the country. Although that stands as the extreme case, the broader European project has often been advanced despite, not because of, the wishes of the Union's electorates.
This disconnect is the crack that runs through the E.U. -- which recent events have widened. The reluctance of Germany's government to sanction explicit fiscal support for Greece is not just about reflexive German prudence but also expresses voters' deeper dismay over what has come to pass.
The Greeks spent more than they could afford. They should be made to live with the consequences. Moreover, Germans look at the European Central Bank -- supposedly the custodian of Bundesbank rectitude -- and see it forced to buy the junk bonds of Greece and other overextended governments. The idea was that Greece would import German standards of governance. Instead, Germany is being made to import Greece's.
German voters have been stepped on by their governments so often in recent decades that one had supposed that they had grown to like it -- but maybe not. In any event, German politics is now the crucible in which the future of the E.U. will be formed.
The classic E.U. response to this crisis would be to renew the drive to political union. First, mobilize joint resources for emergency financial support. This is already in train, with the enormous bailout recently cobbled together, but even bigger sums will likely be needed. Second, tighten central control over nations' public borrowing, so the crisis will not be repeated.
German voters detest the first policy so much that they may call a halt to it. And voters across the entire E.U. will be alarmed at the second, which will further erode their sovereignty and democratic control.
So the E.U.'s new crisis is not just about economics and finance, much as financial markets may be calling the shots at the moment. Even more, it is about the fissures in European democracy. Repairing them before they shatter the whole enterprise means stepping back from the "ever-closer union" that Europe's voters do not want.
Managing the crisis, however, requires just the opposite.
Previously in Wealth of Nations
- A Lesson From The British Election (05/08/2010)
- Make A VAT Part Of The Solution (04/24/2010)
- How To Pay For Health Care Reform (04/03/2010)
- Dodd Misses The Point Of Financial Reform (03/20/2010)
- Taxes Will Go Up -- Get Used To It (03/06/2010)
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