NEW YORK – The European Union was brought into existence by what Karl Popper called piecemeal social engineering. A group of farsighted statesmen, inspired by the vision of a United States of Europe, recognized that this ideal could be approached only gradually, by setting limited objectives, mobilizing the political will needed to achieve them, and concluding treaties that required states to surrender only as much sovereignty as they could bear politically. That is how the post-war Coal and Steel Community was transformed into the EU – one step at a time, understanding that each step was incomplete and would require further steps in due course.
The EU’s architects generated the necessary political will by drawing on the memory of World War II, the threat posed by the Soviet Union, and the economic benefits of greater integration. The process fed on its own success, and, as the Soviet Union crumbled, it received a powerful boost from the prospect of German reunification.
Germany recognized that it could be reunified only in the context of greater European unification, and it was willing to pay the price. With the Germans helping to reconcile conflicting national interests by putting a little extra on the table, the process of European integration reached its apogee with the Maastricht Treaty and the introduction of the euro.
But the euro was an incomplete currency: it had a central bank but no central treasury. Its architects were fully aware of this deficiency, but believed that when the need arose, the political will could be summoned to take the next step forward.
That is not what happened, because the euro had other deficiencies of which its architects were unaware. They labored under the misconception that financial markets can correct their own excesses, so the rules were designed to rein in only public-sector excesses. And, even there, they relied too heavily on self-policing by sovereign states.
But the excesses were mainly in the private sector, as interest-rate convergence generated economic divergence: lower interest rates in the weaker countries fueled housing bubbles, while the strongest country, Germany, had to tighten its belt in order to cope with the burden of reunification. Meanwhile, the financial sector was thoroughly compromised by the spread of unsound financial instruments and poor lending practices.
With Germany’s reunification, the main impetus behind the integration process was removed, the financial crisis unleashed a process of disintegration. The decisive moment came after Lehman Brothers collapsed, and authorities had to guarantee that no other systemically important financial institution would be allowed to fail. German Chancellor Angela Merkel insisted that there should be no joint EU guarantee; each country would have to take care of its own institutions. That was the root cause of today’s euro crisis.
The financial crisis forced sovereign states to substitute their own credit for the credit that had collapsed, and in Europe each state had to do so on its own, calling into question the creditworthiness of European government bonds. Risk premiums widened, and the eurozone was divided into creditor and debtor countries. Germany had changed course 180 degrees from the main driver of integration was to the main opponent of a “transfer union.”
This created a two-speed Europe, with debtor countries sinking under the weight of their liabilities, and surplus countries forging ahead. As the largest creditor, Germany could dictate the terms of assistance, which were punitive and pushed debtor countries towards insolvency. Meanwhile, Germany benefited from the euro crisis, which depressed the exchange rate and boosted its competitiveness further.
As integration has turned into disintegration, the role of the European political establishment has also reversed, from spearheading further unification to defending the status quo. As a result, anyone who considers the status quo undesirable, unacceptable, or unsustainable has had to take an anti-European stance. And, as heavily indebted countries are pushed towards insolvency, nationalist political parties – for example, Finland’s True Finns – have grown stronger, alongside more established counterparts elsewhere in Europe.
Yet Europe’s political establishment continues to argue that there is no alternative to the status quo. Financial authorities resort to increasingly desperate measures in order to buy time. But time is working against them: two-speed Europe is driving member countries further apart. Greece is heading towards disorderly default and/or devaluation with incalculable consequences.
If this seemingly inexorable process is to be arrested and reversed, both Greece and the eurozone must urgently adopt a Plan B. A Greek default may be inevitable, but it need not be disorderly. And, while some contagion will be unavoidable – whatever happens to Greece is likely to spread to Portugal, and Ireland’s financial position, too, could become unsustainable – the rest of the eurozone needs to be ring-fenced. That means strengthening the eurozone, which would probably require wider use of Eurobonds and a eurozone-wide deposit-insurance scheme of some kind.
Generating the political will would require a Plan B for the EU itself. The European elite needs to revert to the principles that guided the Union’s creation, recognizing that our understanding of reality is inherently imperfect, and that perceptions are bound to be biased and institutions flawed. An open society does not treat prevailing arrangements as sacrosanct; it allows for alternatives when those arrangements fail.
It should be possible to mobilize a pro-European silent majority behind the idea that when the status quo becomes untenable, we should look for a European solution rather than national ones. “True Europeans” ought to outnumber true Finns and other anti-Europeans in Germany and elsewhere.