Crisis in the EU

The National Interest

July 20, 2010

An Economist leader on the future of Europe proclaims that the Continent is “Staring Into the Abyss.”  The Week has “Europe on the Brink.”  Investment guru John Mauldin, too.    The proximate cause of all this, naturally, is the crisis of confidence in the euro but there is also considerable consternation about divisions within the EU, particularly the increasingly sharp positions taken by Germany and France.

While these essays and others like them point to very real problems with the European project in general and the Eurozone in particular, they tend to make one or more of three mistakes:  Treating the EU as if it were a nation-state, regarding anything less than Utopia as a failure, and projecting short-term trends long into the future.

“Europe” Remains a State of Mind, Not a Place

Too many observers treat the EU as if it were in fact the “United States of Europe” of which many have long dreamed or feared.   In reality, however, it is a conglomeration of 27 states, each with their own domestic political considerations and national interest calculations,  working together in a rather unusual way.   As the EU’s website puts it, “the member states delegate some of their decision-making powers to shared institutions they have created, so that decisions on specific matters of joint interest can be made democratically at [the] European level.”

It’s hardly shocking, then, that there is enormous tension during times of great crisis.

The Economist complains that “the debate about how to save Europe’s single currency from disintegration is stuck. It is stuck because the euro zone’s dominant powers, France and Germany, agree on the need for greater harmonization within the euro zone, but disagree about what to harmonize.”

But, surely, one could make a similar argument about divisions within the United States over dealing with the economy?   Not only do Democrats and Republicans have very different ideas about how to handle the situation but so do House and Senate Democrats.  The Senate has been tied up in knots for weeks over something as simple as extending unemployment benefits and we’re only just now coming to something of an accord — and a very watered down one at that — on financial regulatory reform. 

And we’re not only an actual country, rather than a confusing array of overlapping treaty commitments between 27 countries, but we’ve been at it roughly two centuries longer.

Western democracies all feature leaders who put off making hard choices beyond the breaking point because of the incentives of electoral politics.  That’s true in the United States and would be true in Europe even if the EU were still nothing more than a free trade area.   Obviously, adding the myriad Brussels bureaucracies on top of this makes it harder, especially since the Lisbon Treaty has created new institutions jockeying for power and status.  And, certainly, having the new system emerging in the midst of a the biggest global economic meltdown in decades didn’t help matters.

But too many critics conflate setbacks with failure.

Failures Don’t Necessarily Mean Failure

The editorial in The Week contends, “The crisis has vindicated critics who have always insisted that roping 16 states together into one monetary system, but leaving their fiscal policies uncoordinated, was a recipe for instability” and fears a scenario “whereby nations are allowed either to default within the euro zone or to leave—essentially the end of the euro as we know it.”    

We’re likely past that worry for now.  But what if it were to come to pass?   It would be a major setback, of course.  But Europe managed to get by without a common currency as recently as nine years ago.   And 11 of the 27 EU member states, including the UK (the world’s 6th largest economy) manage to participate as fully functioning members of Europe despite not having adopted the currency.    There’s simply no reason to think Europe would fall apart if Greece reverted to the drachma or Portugal to the Escudo.

Much the same is true about political integration.   It would be much better for both Europeans and Americans if “Europe” were to quickly emerge as a single actor on the world stage.  Having to deal with 27 national capitals plus three major EU institutions on everything from international security to trade is inefficient and exhausting.   

But we’re closer to that reality than we have ever been.  The fact that we’re still not all that close is simply a sign of how far we’ve had to go. 

The “Current Trends” Problem

Without question, the failure of the European project would be devastating.    But the default mode of political commentary is to project very short-term trends as far as the eye can see.   Political parties currently in the ascendancy will create a permanent realignment!  Booming economies rewrite all the old rules, creating permanent growth and the repeal of the business cycle!  The Dow will hit 30,000!   The middle class is doomed!   We’ll never get back to previous levels of employment!   Our politicians won’t lead!

Except for the last one, which seems to be a constant, the fact remains that, as the late economist Herbert Stein observed, “That which is unsustainable will not be sustained.”   At some point, Europe’s politicians — and our own — will be forced to make hard choices.  Until then, they’ll dilly dally.

But, ultimately, either the Germans will prevail and persuade their eurozone comrades into austerity, the French will persuade the Germans to be more free with their purse, or some other alternative will be chosen because circumstances force choices to be made.  Maybe Greece will still be part of the Eurozone, maybe it won’t.  Maybe — although I very much doubt it —  Germany will decide that going back to the Deutsche Mark makes the most sense and they’ll take their lumps.

Regardless of the policy choices made, it’s unfathomable that Germany, France, the United Kingdom, and most of the other members of the EU will decide that they’d be better off not cooperating with one another in some very intense fashion on economic and security issues.  Indeed, it’s just inconceivable that any but the most tangential current EU member won’t be part of a free trade, open border zone with all the others.  The benefits are so large and so engrained in the European culture at this point that abandoning progress would be mad.

The original article has disappeared from TNI’s archives and is not available via the Internet Archive. I have reproduced this from my original submission.