Towards A United States Of Europe?

We keep on hearing the wrong complaints about Europe coming from America. It is quite understandable that the anxious American men and women trying to make a living from finance are resentful that "Europe can’t get its act together." It must appear from the other side of the pond that Europe’s political leaders are squabbling while the Treaty of Rome burns, but that’s to look at Europe through American eyes.

Europe is not America and never will be
The European Union is not a United States of Europe. It is principally a gentleman’s agreement to introduce a uniform commercial and financial marketplace. The political advantage of this was to prevent a recurrence of the endless wars the nations of Europe have fought with each other since time immemorial, and its economic advantage was to facilitate a much wider home market for each member state’s goods and services. Naturally enough, this latter was greatly to the advantage of Germany, which was able to supply the rest of Europe with its produce, generally of better quality and price than elsewhere on the continent.

Only trade matters
It worked at that level, too. Germany and France, which suffered three devastating violent conflicts with each other in the course of less than a century, have remained good neighbours, and since the Treaty of Rome was signed in 1957 no EU member has fought with another. And, there can also be no doubt that the removal of customs duties between the member states boosted trade within Europe.

Nothing to share
The snag is that Europe is not a continent of immigrants, as is the United States. Most EU nations have their own unique language and all of them have a history and culture which they do not share—or which is even conflicting—with other member states. The current difficulties with the euro are a result of the EU politicians of the 90s failing to recognise this.

Understanding the state
The crucial element those political leaders missed was the radical difference between the northern European understanding of the state and that of southern Europe. For Scandinavia, The Netherlands and Germany, the concept of national fiscal discipline is reasonably well established. France too shares this understanding to a greater or lesser extent. But the addled political leaders of these countries in the 90s assumed their cultural tradition of fiscal discipline also applied to Ireland and the Club Med (Italy, Portugal, Greece and Spain).

Understanding spending
We like the idea of using one’s powers of observation to determine the situation. Had the EU leaders in the 90s done that, they would have seen easily enough that Greece et al were familiar with quite another system, which boils down to their governments overspending liberally, so that the politicians in power could milk the state to reward their own supporters.

The notion of nationhood
It comes down to a very different notion of what constitutes nationhood, which for the Club Med has always been an artificially imposed structure of authority imposed above the, for them, true authority of the family. Ordinary citizens regard it as a duty to evade taxes if that benefits their own family, and politicians in power believe it is quite acceptable to subordinate the needs of the state – such as a balanced budget - if in so doing they benefit their wider "family," their supporters and party members.

That potentially disastrous dichotomy could in the past always be resolved by a devaluation of the currency. The locals grumbled, there was a riot or two, but they went on being given the same wages, so they put up with it. They could live with a couple of years of high inflation, after which they could export their way out of poverty. And so went the cycle, a kind of Groundhog Day loop.

Suicide is not painless
With the euro, the usual mechanism of devaluation is no longer open to the Club Med, and the alternatives of defaulting on their debt or exiting the eurozone don’t seem nearly so pleasant. It is far from certain that the alternative, massive government budget economies, will work, either. The more a government economises the more the economy goes into decline; government tax revenues drop, and so they need to economise even more. They find themselves in a catastrophic downwards spiral.

Just imagine
If the US Treasury Secretary imposes a measure which badly affects Louisiana, for instance, there may be grumbling, especially if the Treasury Secretary in question isn’t a Southerner, but imagine what would happen if the Treasury Secretary imposing an unpopular measure on Louisiana came from Germany. That would be a problem of a quite different magnitude, and it is exactly how the Greeks feel about being told what to do by Otto Rehn, a Finn who is the EU’s Commissioner for the euro, or Jean Claude Juncker, another busybody who happens to be Prime Minister of miniscule Luxembourg.

No way
It simply won’t work, however much Europe’s politicians go on babbling with each other. It isn’t a case of Europe getting its act together. There is no act to be got together, and behind that there is no single united vision of what a united Europe needs to be.

One giant step too far
All this means the euro was a step too far. There is no solution to the present difficulties being experienced by the Club Med other than letting them go bust and dump the euro. The countries of northern Europe would do well to abandon sending yet more cash to the south. The amounts involved exceed anything Germany and the rest could raise.

Ring-fencing the core
The better solution would be for Germany, The Netherlands and Scandinavia to start ring-fencing their banks so that they will not collapse when the euro goes west.

This will be a very costly process in itself, but it ought to be possible. By contrast, saving the euro will prove utterly impossible, fruitless, ruinous and debilitating.

Providing the core is not rotten
Another mistaken view, this time held widely here in northern Europe, is that the problem is restricted to the Club Med countries, where public debt has become unmanageable. In The Netherlands' public debt is well under control, and the next cabinet after the elections this month will almost certainly impose stringent spending cuts to ensure the country stays within the EU norm of a maximum spending deficit of 3%. But what of its private debt?

The lion’s share of private borrowing in The Netherlands comes for example from home mortgages, and house prices are heading south towards Greece at an alarming rate. According to the Central Bureau for Statistics (CBS) in The Hague, residential property prices fell 8% year-on-year in July. The rate of decline is increasing. 8% is the worst fall since CBS started recording the figures in 1995, and it takes the general house price level back to that of 2004.

In the national daily NRC, we read on 10th August:
At the close of next year a quarter of all Dutch home owners will have a higher mortgage debt than the value of their property, according to ING’s Housing Market Quarterly Monitor. In addition, ING economists predict that house prices will fall a further 10%. Halfway through last year some 500,000 households would have been left with a debt were they to have sold their property. At that moment their mortgage would have been greater than the value of the house. The ING economists predict that this number will increase to 800,000 next year, leaving 23% of all house owners "under water."

The perception that southern Europe will default and its banks will fail could be accompanied by a growing feeling that northern Europe’s private debt could become unmanageable, leading inexorably to its banks failing too. Perhaps when rejecting Club Med pleas for cash, it would do the Dutch well to show a degree of modesty lest they find themselves in a not too dissimilar state of penury.

Co-written with Barry O'Dwyer.