Europe’s Top-Down Myopia

MUNICH – The French statesman Georges Clemenceau famously remarked that, “Generals always fight the last war.” Today, in the wake of the euro crisis, the same might be said of the European Union as it seeks to put itself on a more stable institutional footing.

The EU is undergoing fundamental changes, many of which have gone largely unnoticed, owing to the overwhelming focus on large-scale top-down reforms. Officials seem not to recognize change unless it takes the form of Eurobonds, new European treaties, or policy reversals by German Chancellor Angela Merkel. But the case for small steps guided by market mechanisms is strong.

Europe’s obsession with top-down reforms is rooted in prevailing analyses of the causes of the euro crisis. Most people in Germany, the Netherlands, and Finland blame excessive public spending and inadequate regulation in countries like Greece, Spain, and Cyprus for destabilizing the eurozone and, in turn, the EU.

A somewhat more nuanced analysis holds that the euro itself is responsible for these countries’ problematic spending. The European Central Bank’s one-size-fits-all monetary policy created destabilizing imbalances in the eurozone. Interest rates were too low in Southern Europe, where governments and households binged on cheap loans, and arguably too high in Germany, which was already held back by the economic burden of reunification.