The Fate of Europe, Nearing the Point of Decision

Summary:  Will Europe become a collection of pawns?  Or unify into a great nation?  The time of decision approaches.   Our news media ignore key aspects of the situation, making the actions of Europe’s leaders look foolish.  They’re not.  Here we will look at the challenges that lie ahead, and what’s at stake for Europe.

In July 2008 I asked  Can the European Monetary Union survive the next recession? My answer was “probably not”.  So far that forecast has proven wrong.  What comes next?

Contents

  1. The challenges ahead
  2. Why unify?
  3. The path ahead divides:  unify or divorce
  4. What will they do?


(1)  The challenges ahead

Germany’s Federal Constitutional Court ruled on February 7 that “Constitutional complaints lodged against aid measures for Greece and against the euro rescue package {are} unsuccessful; no violation of the Bundestag’s budget autonomy”  (see the ruling here).  This ended the current phase of unification, during which the Federal Cabinet made decisions for Germany — creeping federalism, incremental steps unifying Europe.  Opinions differ on the implications of the ruling for the future; it certainly made future bailouts more difficult by requiring Bundestag involvement.

The European Economic and Monetary Union (EMU) probably enters the endgame during the next year, as one of the following emerges suddenly and unexpectedly.  Greece is the firebreak; once through Greece the fire probably quickly spreads to the other PIIGS.

  1. Any member of the EMU can abort the process, not just Greece and Germany (e.g., Neatherland’s and Finland’s demand for collateral on future loans to Greece).
  2. This becomes more likely as public support continues to decline in both creditor and debtor nations.   Hence partisan maneuvering, legislative votes, and  elections can have outsize effects — or even spark the endgame. Like Berlin State election on 18 September, or the September 29 Bundestag vote on the European Financial Stability Facility (EFSF).  A trial vote did not go well (see Reuters).
  3. The ECB and IMF  might impose such tight conditions that Greece bolts (They are unlikely on their own to end the bailouts).
  4. An economic slowdown or recession in Europe probably destroys the enthusiasm for bailout and austerity programs.
  5. A loss of confidence by bank investors might spark a run on Europe’s banks, by sovereign bond investors might destabilize government finances.
  6. Speculators’ hot money might destabilize the situation (much as its driven the Swiss Franc to crazy levels).  So far they’re pushing down the Euro, boosting Europe’s exports.
  7. The high-growth emerging nations fighting inflation (e.g., China) are depressing global growth, hurting Europe’s exports.  Ditto for the slowing America and Japanese economies.


(2)  Why unify?

US conservatives often describe Europe’s unification as quixotic or a leftist plot.  It’s neither, but something America refuses to do:  prepare for the 21st century.

Europe`s leaders have worked to unify Europe since WWII (Of course, that’s an over-simplification.  The are not a unitary element, and many oppose unification).  Success would bring a host of economic benefits.  Failure would make them small powers kicked around by the 21st century’s great powers (e.g., USA, China, Russia, Brazil).  Germany, France, and Britain have done it to others for centuries; they do not want it done to them.  But e pluribus unum takes time, effort, and often war.

Due to our long English heritage, we often forget the short history of Europe`s nations.  Belgium began in 1839 (on weakly together even today); Germany and Italy a few decades later.  Going from young nations to a supra-national state so quickly has few or no historical precedents.

Nor was it easy.  Italy and Germany unified smoothly in the 19th century — compared to some.  America and France overcome regional differences far smaller than across Europe, in nations already unified, only through wars (Napoleonic and Civil).  America’s regions despised one another until the late 1800′s, forged into a nation by the Civil war.  Only about 1 of 8 Frenchman spoke proper French in 1800; most spoke somewhat mutually incomprehensible regional dialects.

Europe’s leaders slowly brought Europe together after 1945.  They they gambled, attempting a currency union before political union.  Success will bring applause from future historians for their boldness; failure will bring mockery at their foolishness.   It might have worked if they had more time before a recession induced massive strains in the EMU fabric.  But the recession arrived, and revealed the primary failure in the project:  Europe’s people do not support it.

Europe has come so far, and I`ll bet they will join together. Eventually.  But the current phase of the process looks likely to end badly, setting it back decades or generations.

(3)  The path ahead divides:  unify or divorce

What happens if Greece leaves the EMU? Nobody knows the political or economic consequences. Experts disagree, and guesses remain guesses no matter how confidently stated.  What happens if they decide to remain together, taking the next steps to unification?  Ditto, more unknowns.  Starting the endgame (e.g., Greece defaulting) does not answer these questions:  it initiates a series of decsisions with unpredictable results and long-term effects.

The one certain-to-fail choice:  failure to choose.  A tree lies ahead in the intersection.  As they dither the tree grows larger in the windscreen.

A series of crises help Europeans adapt to change.  Each crisis forces them to adjust and prepare.  Eventually they accept the need to change, which initiates the endgame.  That point appears close, as seen here:  “German Finance Minister Prepares for Possible Greek Bankruptcy“, Der Spiegel, 10 September 2011 — Excerpt:

German Finance Minister Wolfgang Schäuble, who is reportedly doubtful that the country can be saved from bankruptcy, is preparing for the possibility of Greek insolvency. Officials in his ministry are currently reviewing scenarios for handling such a situation, exploring what it might mean for the rest of the euro zone. Under the first scenario for a Greek bankruptcy, the country would remain in the euro zone. Under the other, Athens would abandon the common currency and reintroduce the drachma.

(4)  What happens next?

Amidst the clatter of delusionally confident predictions about the unknowable, all we can only say that Europe’s leaders have successfully held the EMU together during the four years of the worst recession since the 1930′s.  Quite an accomplishment.

Despite the critics, Europe does not face economic failure, as the core EMU nations have the capacity to easily support the PIIGS through the restructuring process.  And the PIIGS are restructuring fast.  The Greeks, Spaniards, and Portuguese have accepted the EU-imposed depression better than many expected (me, too), showing a remarkably high level of social cohesion. I wonder if America could do so well.

It’s not just an European event.  Chaos there will echo around the world.  Coordination among governments in Europe and globally will be essential to minimize the shocks, but prove impossible to achieve.

There are no easy solutions.  Both paths have high costs.  There are two widespread views about the endgame.

  • The costs of unification are too high to pay; the public support too low for success.  Breakup is certain.
  • The costs (and complexity) of breakup are too high to suffer; the benefits of unification are too great to lose.  The cost in the first year might be 25% of GDP for Germany (and the other creditor nations), and 50% of GDP for Greece (and the other creditor nations).   Unification is likely.

The first ignores Europe’s history since WWII, the need to unify, and the determination of its leaders to unify.  The second represents the Norman Angell theory of history.  His 1909 book, The Great Illusion, showed that Europe’s economic integration made war illogical.  In 1914 Europe acted illogically.  Europe might do so again soon.

Other posts about Europe on the FM website

  1. Can the European Monetary Union survive the next recession?, 11 July 2008
  2. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
  3. Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
  4. Governments cannot go bankrupt, 2 April 2010
  5. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
  6. Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010


This post originally appeared at Fabius Maximus and is reproduced here with permission.

2 Responses to "The Fate of Europe, Nearing the Point of Decision"

  1. ObamaMemos   September 13, 2011 at 12:06 pm

    The Eurozone should reduce the gold cover ratio of Euros, from 15% to 10%, thereby creating one third more Euros, separate and apart from Euros in general circulation, with which to amortize or re-purchase a significant part of Eurozone sovereign debt. In the case of debt re-purchase, debt interest payments become disposable income.

    This asset-based intervention will create a more stable Union.