Will the EU collapse or grow stronger?

When I was in junior high learning about the rise of the European Union, it seemed like apocalyptic history in the making. It was a definitive step toward the evangelical’s eschatological future of one-world government. As such, I find it fascinating that in the last several months the threat of the EU’s collapse has grown from hushed whispered conjectures on economic blogs to front-page mainstream-media discussion across the world. I’ve gone from believing the world was on its way to political unification to believing that the main evidence for that belief was going to collapse any day now.

Yet recently I’ve been alerted to a new possibility that hearkens back to those eschatological days of old: if the current structure of the European Union is found unsustainable, it could reborn as a stronger entity, just as the Constitution followed the Articles of Confederation in America, or as the United Nations replaced the League of Nations after World War II.

Let’s recap:

Most of all the debt crisis represents the stunning failure of the European Union, and especially the 17-nation eurozone, to deliver on its promise. Launched in 1999, the euro currency was designed to bind nations into a tighter economic union so that weaker members such as Greece and Italy would draw strength from their prosperous partners and close the gap in growth and productivity.

Now,

Highly indebted countries such as Greece and Italy could drag down their healthier economic neighbors.

Of course that particular author’s bias may have led to those choices of words, but that sounds a lot like the abstract dangers of socialism – the stronger are supposed to strengthen the weak, but with inherently improper incentives in place, the weak end up weakening the strong. Now the economic systems in place were not literal socialism, per se, but the incentives of the political structure of the European Union were arguably comparable.

The problem is identified by this article:

The E.U. has created a single currency, but it hasn’t forged a deeper political or fiscal union. The result has been the creation of a system that yokes individual countries to a single unified monetary policy, without allowing for the transfer of funds that would allow the union’s member states to ride out the distortions that setup can create.

Essentially, the countries all got to share the benefits of having a single currency without enforcement mechanisms in place to ensure that they handled those benefits wisely, and a lot of countries ended up abusing that privilege by racking up massive debts. Now those debts are threatening the future of those countries’ currencies – which of course is the same currency as the other countries.

But there are two distinct possible futures. The vice president of the Italian senate wants

further centralization of political power… it would include a Finance Ministry in charge of economic stabilization, and, when needed, transfers of funds from the central government to individual states. The common political identity, she argues, would make the necessary redistribution more palatable. “Help normally comes only if there is a shared feeling of belonging,” she says.

The other possibility – argued most loudly in Germany, where anger is mounting about taxpayers being forced to bail out less-responsible countries like Greece or Ireland – is to start to break the union apart.

Naturally, the “less-responsible” countries want to reforge with stronger ties to the “responsible” countries, and the “responsible” countries want to cut their neighbors clear out. The question is simply whether or not Germany’s fate is already so tied to their neighbors that they have to strengthen their ties in order to save themselves. (For now, the country is resisting the “Eurobond” solution that would in a roundabout way amount to it guaranteeing its neighbor’s debts – even Tyler Cowen’s talking about moral hazard now.)

When you do something halfway, you often eventually discover that it’s not going to work. Europeans can either decide to go farther down the path of acting like a single, larger country (like the formation of the United States), or they can go back down the path of individual countries (like the breakup of the Soviet Union). But countries have a tendency to take on unsustainable debt loads when they are given incentives for doing so, and it’s proving that Europeans can’t stay where they are. Where they go next is up to them.

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One Response to Will the EU collapse or grow stronger?

  1. joshuahedlund says:

    It has been three months since I wrote this post. When I wrote it, the collapse of the Eurozone had gone from unthinkable to possible. The number of European countries with debt problems continues to grow, and now it has gone from possible to probable. Discussion seems to revolve not around if, but when. Germany had a failed bond auction last week, and we wall watch with nervous eyes to see what happens with the other European bond auctions in the coming weeks.

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