Europe: Forging a Union

Europe is at a difficult crossroads. On one hand, the member states want to forge a stronger union. On the other hand, there are a myriad of obstacles that makes such a scenario unlikely. However, one thing is for sure. No European wants to abandon the euro. Yet, in order for it to survive, there has to be more integration. As much as Germans may complain about the euro, they have been one of the biggest beneficiaries of monetary union. Almost two-thirds of total exports go to the euro zone. Only 6.7% are destined for the U.S. and 4.5% depart for China. Germany’s relative competitiveness allowed its firms to grab market share across the continent. Moreover, German exports are not relegated to high-tech engineering products. It even exports milk to its European counterparts. Therefore, Germans would be one of the losers from its demise. Of course, they are not the only ones who love the euro. Europeans across the southern latitudes embrace the economic stability and access to credit that it brought. The euro heralded an era of unprecedented prosperity that boosted the purchasing power of the lower classes. Likewise, the banks also do not want to see the end of monetary union. The collapse of the currency unit would wreak havoc with their balance sheets, plus it would lead to systemic defaults across most of the private and public sectors. Therefore, there is a fundamental desire to see the currency survive. Yet, the costs are gut wrenching. The looming fiscal adjustments and asset deflation will consign Europe to years of low growth and high unemployment. Unfortunately, this is a sacrifice few Europeans are willing to contemplate. Nevertheless, doing so, would allow Europe to approach something akin to statehood.

The birth of nations is a torturous process. France, Holland, Spain and the U.K. were the first major European states to emerge during the 15th and 16th century—each forged in a crucible of civil strife. However, the consolidation of these territories into states allowed them to create the economies of scale needed to project power abroad and accumulate colonial possessions. The German and Italian states resisted doing the same, but they eventually learned that they were vulnerable. For example, Genoa and Venice were powerful naval city-states that dominated the Mediterranean for most of the Middle Ages and Renaissance. However, they were no match for the pooled resources brought to bear by the emergence of the French, Spanish, Dutch and British fleets of the 18th and 19th century. Therefore, it was only natural that they would soon have to embark on a process of consolidation and nation building. Nevertheless, it was arduous. From abroad, each European country may appear singularly unique. Nevertheless, they are an amalgamation of disparate cultures, languages and religions that were smashed together through a process of violence and coercion—just ask any Walloon, Catalan or Napolitano. Of course, this is not unique to Europe. The consolidation of the U.S. involved a bloody civil war. The histories of Argentina, Chile, Thailand, Vietnam and Russia were full of violent conflicts, as each society coalesced into states. The amalgamation process produces winners and losers, with the latter surrendering their property, rank and privileges.

This is the type of ordeal that lies ahead, if Europe is really sincere about further integration. In other words, much more needs to be done. The fiscal adjustments that were recently announced in Spain, Italy, The Netherlands and Germany were cosmetic. Europe now needs to tackle its myriad of labour regimes and regulatory frameworks. For example, how is it that one can use the same currency unit across most of the continent, without having to exchange money, but you cannot the use same cell phone service, without having to endure roaming charges? Each country has its own fiefdom of service providers that enjoy monopoly types of rents in sectors such as telecommunications, electricity and banking. These are many of the inefficiencies Europe needs to dismantle, if it really wants to forge itself into a single economic union. Of course, this will produce winners and losers—and the latter will not easily abandon its perks. Therefore, Europe has a bleak horizon ahead of it. Will it undergo the painful consolidation needed to become a truly global superpower that can rival the U.S. and China, or will it fragment into a lose collection of petty fiefdoms. Europeans were able to do it in the past, but can they do it again? If so, it will be a very painful delivery and birth.