Welcome to the United States of Europe

 Recent events in Europe have several experts predicting the demise of the European Union and/or the disintegration of the European Monetary Union. Whether the discussion is about Ireland, Greece, Portugal, Italy, or DSK’s dickey, the oft-heard conclusion is that something is about to end. My hunch is just the opposite – humdrum stuff was making the EU/EMU pretty boring for a while but now we see the seeds of an even tighter Europe Union and new steps toward the United States Of Europe. Challenge and fear seem to be stronger motivators of integration at times when hopes and dream fail to spur change.

Let me frame my argument with a review of EU history and please excuse me for leaving out all the details. Please wake me up when this over. If you prefer a more formal (i.e. correct) summary of EU history you might try http://europa.eu/about-eu/eu-history/index_en.htm

·         There were two world wars that for the sake of convenience and generally accepted accounting principles George Bush named them WWI and WWII. These wars found Europeans as enemies and led to recognition by many European countries after WWII that life would be a lot more pleasant if they would find a way to stop killing each other. Estimates for deaths incurred during these two world wars begin at about 50 million. Germany, France, and the Benelux countries decided that if they cooperated in the production of iron and steel that would be a nice beginning. The idea was that economic integration might breed common interests and someday lead to zillions of tourists traveling in VW buses eating French fries gobbed with mayo while dropping gazillions of dollars and yens in GeFrBeNeLux. It soon seemed easier to start calling it the EU.

·         In 1973 Denmark, Ireland, and the UK joined the EU and thereafter other countries wanted to join. The US tried to join but EU leaders explained to Nixon that the US was not actually in Europe and while they appreciated being protected by the US military, they didn’t really like us enough to make an exception to that all-European thing.

·         Other European countries kept joining thinking that membership included Green Stamps. As of today there are 27 countries in the EU. There are another five countries asking for admission. 

·         In 1993 the single market concept was approved into law and that included a ton of legislation that helped form a single market for goods, services, persons, money, and Jerry Lewis.  As these countries expanded their trade with each other it made a lot of sense to remove as many obstacles as they could. A single market means that many national impediments to trade were removed and the economy of many nations functioned as if it was one.

·         In 2002 many of these EU countries decided it would be better to ditch their currencies and replace them with seashells. After some experimentation with this new idea it was felt that seashells were not the best idea so the euro currency was invented and has to date been adopted by 17 of the countries. As the markets were becoming more integrated the costs of having to deal in so many different currencies became pretty obvious. It was a big step for those 17 countries but they did it to make Europe work better.   Without home currencies the control over the new euro would be done jointly by a new institution called the European Central Bank. While the central banks of these countries participate in all ECB decisions, no single country holds a veto over ECB power.  Sovereign policy over money, interest rates, exchange rates and more was given over to an extra-national body.

·         Ever since the adoption of the euro it was pointed out by many experts that it makes little sense to have monetary union without a fiscal union. But then, you could also argue that it makes no sense to have monetary and fiscal union without complete national unity.   The EU has integrated one step at a time and the logic of slow and steady seems more prevalent than these kinds of arguments. I will return to this point below.

·         Along the way the institutional make-up of the EU took form and the EU is composed of a real transnational government with an EU Parliament, a Council of Ministers, A Commission, Court of Justice, Court of Auditors, and a Court Jester (Jerry Lewis). While this set of institutions reminds us of the USA and of American’s national institutions, our EU friends are quick to remind us that this is not a strong federal government and its budget reflects a loose federation with limited powers. These 27 countries have given up national sovereignty in some areas (as defined by EU Treaties) but unlike Alabama and Indiana, these 27 countries remain independent and sovereign nations.

This last point gets us a little closer to my main point. It seems to me that this is a mostly irreversible train that is heading towards USville. I get that these are 27 sovereign nations but I also get that over the years they have given up more and more independence and little of their posturing or behavior now would suggest that 55 years of experience makes them so sure that this was all a big mistake. 

In fact the temperature of the debate over Greek debt underscores how serious they are about saving both the EU and the EMU. Yes these are difficult and heated disagreements. The French and the Germans have very different ideas about how to solve the crisis and are almost as vehement about their positions as they are about soccer. The ECB also has its own ideas about the correct solution.

And they should feel strongly about all this. Why? Because the Greek crisis isn’t so much about Greece as it is about a new round or a new layer of EU control and loss of national sovereignty. It was one thing to allow the EU to have control over laws governing the flow of goods, services, people, and money. It was another thing to create a European Central Bank that replaced the independent decisions of 17 countries over money and meant that 17 countries gave up direct controls over their own exchange rates. It was another leap to change the voting and other rules for making EU decision so that 27 countries would have more equal voting rights.

But despite all that brotherhood and giving up of sovereignty – they still had their own 27 fiscal policies. These countries could set their own taxes and government spending.  Sure, the Maastricht Treaty codified guidelines that said how large a country’s deficits and debts might be. But that was not a real dilution of national control. These Maastricht limits have been avoided on numerous occasions. Inasmuch, Finland had no responsibility towards a German debt and vice versa. And while it was true that an economic calamity in one country could spill over and harm the citizens of other EU countries, there was not a lot of discussion of how that might be handled.  

Well, the Irish-Greek-Portugal-Spain-Italy situation has changed all that. There is a real chance that fiscal problems in one country can severely damage economic prosperity of the rest. They always knew there was such a potential but until it was screaming in their faces every day, the motivation to do something about it held a low probability. While much of the energy is being devoted in the last weeks to EU or world solutions to the Greek debt problem – this situation is better considered as a new chapter in loss of sovereignty of EU nations. It isn’t only about Greece. It is all about a future EU. It is all about how the EU or the ECB should behave in what has become a new and different economic/financial situation. All of a sudden Finland and Germany have a lot to say about another country’s debt and deficits – and how they resolve them. The Finns would not have been so bold a few years ago. Expanding the EU’s policy jurisdiction was not so important a few years ago. But the fiscal hammer came down. It has everyone’s attention.

If one country’s debt cannot be repaid this acknowledgement impacts the euro’s value. If one country has deficits or debts or real prospects of future deficits and debts – the same is true. If Ireland can’t pay, then the economies of all countries in the eurozone will be impacted. Spillovers are not limited to the exchange rates since the financial systems are highly interdependent. If risk suggests higher interest rates in Greece, then interest rates will rise in other EU countries.  Never before have EU countries looked so closely at each other’s deficits and debts.

One solution is to eliminate or remove the bad guys from the EU club. How exactly do you define a bad guy? Even if you could I don’t see expulsion as a reality. History says it won’t. There are countries that never joined the EU – but there are none that have left. The benefits of the Union are simply too strong and the reasons for leaving too weak. A single market and a single currency create enormous benefits and no country once in will want to be out. Being out gives a country more control over its own currency value but let’s be honest – a plummeting currency value is nothing to be wishing for. These countries are in trouble not because of weak currencies but because of bad policy. The better policy will come more easily from within the Club than from without.  Political leaders of one country never want to admit they failed and need help from the other countries. But the situation today requires that they do this.

The European Financial Stability Facility and a European Treasury are proposals that envision a lot more integration and less national sovereignty when it comes to EU fiscal policy. Euro bonds envision a true regional monetary policy. It is hard to predict what will come of this sovereign debt crisis but one can bet that this current challenge will be met like all the past ones – with lots of heat and light followed by a treaty or agreement in which more countries give up more sovereignty for the purpose of overcoming another challenge to a successful economic experiment that has now lasted more than half a century.  The EU is still a long way from being as integrated as the 50 states that comprise the USA – but they promise to move closer to not farther from that model as time moves ahead.