Fiscal union can’t save Europe

Josiah Neeley R Street Institute
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After the horrors of World War II, European leaders such as France’s Robert Schuman, West Germany’s Konrad Adenauer and Italy’s Alcide De Gasperi hoped Europe-wide institutions would submerge rival nationalisms within a unified whole. They started small, with the European Coal and Steel Community, which was formed in 1951 among six Western European nations. But today the European Union is growing into an all-encompassing political union, including an ill-conceived common currency and a European Central Bank that sets a single monetary policy for 17 of the E.U.’s 27 member states.

Among the original aims of European integration was the promotion of cultural harmony among the different peoples of Europe. As Schuman declared in setting forth the original plan in 1950: “Through the consolidation of basic production and the institution of a new High Authority, whose decisions will bind France, Germany and the other countries that join, this proposal represents the first concrete step towards a European federation, imperative for the preservation of peace.”

Well, this hasn’t exactly worked out as planned. A debt crisis originating in Greece has spread first to Italy, Spain and Portugal, and now threatens even Northern Europe’s economic core. Last week Germany was unable to sell more than two billion euros’ worth of bonds, and interests rates are spiking throughout the Eurozone.

The European elite’s response to the crisis has been to call for even greater fiscal and political integration. This will only exacerbate the current problems. As Bentley University economics professor Scott Sumner has noted, fiscal union means “German taxpayers would be asked to pay for wasteful government programs in Greece and Sicily, even as German voters would have no say in how the money is spent. That’s a recipe for non-stop discord, for a revival of nationalism.”

Advocates of the European Union often cite the United States as a model of successful continent-wide government. Some have even suggested that the problem with Europe is that it is not centralized enough. On this view, the modern E.U. resembles not so much the American constitutional system as it does its predecessor, the Articles of Confederation.

Europe, however, is not America. The American colonists were a diverse lot, but they lacked the profound differences in culture, language, history and religion that separate the Greeks from the Germans and the Finns from the French. Even so, the American Constitution was almost not ratified. The two largest states, Virginia and New York (the equivalents of France and Germany in today’s Europe), ratified it only by narrow margins, and Rhode Island didn’t ratify it until 1790, the year after it went into effect. Moreover, Europe lacks the equivalent of a George Washington, a figure beloved throughout the continent. Washington’s popularity and moral authority allowed the fiscal integration of the new American union to succeed.

Even more fundamentally, the American experiment in federalism succeeded because it was animated by a spirit of liberty that is largely absent from the E.U. As Daniel Hannan, a British representative to the E.U., has noted, the preamble to the American Constitution begins with the words “We the people,” whereas the preamble to the European Constitution (which was rejected by French and Dutch voters but later restyled as “the Lisbon Treaty”) begins “His Majesty the King of the Belgians …” While the American Constitution sets out briefly and succinctly the basic structure of government, the Lisbon Treaty runs for hundreds of pages and includes provisions dealing with such mundane matters as the “promotion of European sporting issues, while taking account of the specific nature of sport, its structures based on voluntary activity and its social and educational function.”

The undemocratic nature of the E.U. can be seen in the way it has responded to the current crisis. On October 11, the government of Slovakia refused to ratify a bailout for Greece. Two days later, the bailout was approved under a new government. Three weeks later, Greek Prime Minister George Papandreou announced plans to subject the proposed bailout plan to a referendum. He too was quickly replaced. Italian Prime Minister Silvio Berlusconi managed to hang on to power despite allegations of corruption, prostitution and worse, but was forced to resign when he appeared insufficiently committed to austerity measures suggested by the rest of Europe. The new Italian cabinet contains precisely zero elected officials.

Europe’s technocratic elite is right to think that having a single continental monetary policy without a unified fiscal policy will lead to disaster (though this is something they should have realized before they gave us the euro). But they fail to recognize that fiscal policy cannot be separated from national sovereignty. Rule by technocrats may delay economic disaster, but it cannot paper over conflicts of vital national interests indefinitely. If the European Union wants to survive, it needs to plan for an orderly break-up of its currency union. And to remain viable over the long run, it must give more latitude to the prerogatives and liberties of its individual member states, rather than trying to lash them all together so that the sinking of one will cause the rest to drown.

Josiah Neeley is an analyst with the Anne and Tobin Armstrong Center on Energy & the Environment at the Texas Public Policy Foundation.