BERLIN – Originally, the European Union was what psychologists call a “fantastic object,” a desirable goal that inspires people’s imaginations. I saw it as the embodiment of an open society – an association of nation-states that gave up part of their sovereignty for the common good and formed a union dominated by no one nation or nationality.
The euro crisis, however, has turned the EU into something radically different. Member countries are now divided into two classes – creditors and debtors – with the creditors in charge. As the largest and most creditworthy country, Germany occupies a dominant position. Debtor countries pay substantial risk premiums to finance their debt, which is reflected in their high economy-wide borrowing costs. This has pushed them into a deflationary tailspin and put them at a substantial – and potentially permanent – competitive disadvantage vis-à-vis creditor countries.
This outcome does not reflect a deliberate plan, but rather a series of policy mistakes. Germany did not seek to occupy a dominant position in Europe, and it is reluctant to accept the obligations and liabilities that such a position entails. Call this the tragedy of the European Union.
Recent developments seem to offer grounds for optimism. The authorities are taking steps to correct their mistakes, especially with the decision to form a banking union and the outright monetary transactions program, which would allow unlimited intervention by the European Central Bank in the sovereign-bond market. Financial markets have been reassured that the euro is here to stay. That could be a turning point, provided it is adequately reinforced with additional steps toward greater integration.