Disunion: Why Europe's Best Chance for Survival Is to Break Apart

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Today, now that the euro is in deep trouble, there are many in Germany who argue that their country was essentially forced to give up its beloved Deutsche mark as the "price for unity." But this is a misreading of history. In fact, some of the most articulate and impassioned advocates of the European single-currency project were German statesmen such as Chancellor Helmut Kohl and Joschka Fischer, Germany's foreign minister and author of the famous 2000 Humboldt speech extolling political union in Europe.

Even as the European single currency was being dreamed up and launched, skeptical economists warned that the European Union was not an "optimal currency area." They argued that levels of productivity and indebtedness within Europe differed too widely. As a result, they maintained, relatively unproductive countries, deprived of the chance to devalue or inflate their debts away, might find themselves in an economic trap. More broadly, many Euroskeptics noted that there had never been an example of a successful and durable currency union that was not backed up by a political union--otherwise known as a nation.

The response to this Euroskeptic critique was threefold. First, many pro-euro economists argued that the very creation of the euro would foster economic convergence--creating an optimal currency area. Second, on the political front, some argued that a common currency could work without a political union on the basis of the rules and regulations of the Maastricht Treaty, drafted and signed in the Netherlands in the early 1990s. Third, some committed European federalists argued that political union would prove irresistible in due course. The mere existence of a single currency, they averred, would foster the expansive federal-budget growth and fiscal transfers within the EU that would be necessary to make the single currency work over the long term. This was how the European project had always worked in the past--with one step toward unity provoking the next. As Javier Solana, the EU's foreign-policy chief, once colorfully put it in conversation with me: "Our philosophy in Europe is, 'Jump in the pool, there is always water there.'"

It is tempting to respond that, in the current crisis, Europe has discovered that somebody forgot to fill up the pool. In reality, the Euroskeptic analysis of the flaws of the European single-currency project has proved to be much more accurate than the predictions of those who created the euro.

The single currency has not, in fact, fostered the economic convergence needed to make it work well. On the contrary, as Germany acted to restrain wages and public spending in the first years of the new century, countries in southern Europe went on a spending splurge: the minimum wage doubled in Greece over the course of a decade; Spain experienced a wild housing boom; and Italy's national debt shot back up toward 120 percent of GDP. The result was that, by the time the economic and financial crisis hit in late 2008, the supercompetitive German economy was booming--while many of the economies of southern Europe were structurally uncompetitive.

The political assumptions behind the creation of the European single currency have also failed to be realized. The rules and regulations meant to ensure the smooth operation of the euro were swiftly violated. In particular, the Stability and Growth Pact, designed to prevent countries from running excessive budget deficits by threatening them with automatic fines, was essentially junked in 2003, when it became clear that France, Germany, Italy and Portugal all faced fines. Rather than the euro leading to deeper political union, it became apparent that European leaders were unable and unwilling to live with even the minimal common budgetary rules they had created.

European federalists argue the game is far from over. In Brussels, it is common to note that European unity has only advanced in moments of crisis. According to this theory, the current debt imbroglio within the euro area is finally forcing European countries to take decisive steps toward political union. The agreement of a new fiscal pact at a Brussels summit earlier this year is cited as evidence that the drive toward political union has resumed under the pressure of the crisis. The pact once again commits European nations to balancing their budgets, under pain of fines. But this time, the necessary provisions are to be written into domestic law--and to be policed much more efficiently by the European Union.

Believers in "ever closer union" argue the steps outlined in the fiscal pact are just the beginning. Over the next decade, they hope and believe Europe will finally agree to the issuance of common debt--otherwise known as Eurobonds. In return for agreeing to this step, the most powerful economies in Europe--particularly Germany--would demand decisive steps toward political union. In effect, the likes of Greece and Italy would trade sovereign control over their national budgets for the full backing of Germany's economic might.

It could happen. But it seems very unlikely. This federalist analysis of how Europe will escape its debt crisis through the creation of a political union repeats and magnifies the original error made in the development of the European single currency. This mistake is to underestimate grievously the strength of national identity in the countries that make up the European single currency. Under economic and political pressure, these nationalist sentiments are actually rising--making it harder and harder for European politicians to agree to profound steps toward political union.

In domestic politics across Europe--in both creditor and debtor nations--leaders are experiencing a backlash against the European project and the further sacrifices of national sovereignty it is demanding. In Greece, parties of the Far Left and the nationalist Right have been gaining ground at the expense of the mainstream parties that led the country into its current parlous state. Even in Spain, where mainstream centrist parties continue to hold power, the traditionally pro-European Popular Party, now that it is in government, is taking an increasingly defiant attitude toward the budgetary strictures emanating from Brussels.

The trend toward less "pro-European" national politics is also visible in the creditor countries--those mainly northern European nations that have been called upon to bail out the southern Europeans. In the Netherlands, polls indicate a slump in support for the traditional mainstream, pro-European parties and a surge in support for the much more Euroskeptic parties of the Far Left and Far Right. This is hardly surprising, given that the Netherlands is under pressure to cut its own budget--even as it comes to the financial aid of Greece, Portugal and the others. In Finland, the nationalist True Finns have exerted enormous pressure on the government to take a hard line in European negotiations.

And in Germany--which is central to any resolution of the crisis--the government is very wary of committing itself to further bailouts or Eurobonds. Despite coming under intense international pressure to concede on these issues--from the United States as well as from the rest of Europe and the IMF--the Merkel government knows it is vulnerable to a public backlash, as well as to a challenge in Germany's constitutional court. It turns out that German taxpayers, who were willing to pay huge subsidies to support the reconstruction of eastern Germany, are much less willing to subsidize Greeks or Italians. It is not just that southern Europeans are not fellow countrymen. It is also that there is no way of ensuring the German taxpayers' money is spent properly. When a leaked German paper suggested that Greek economic and budgetary reforms should be overseen by a supervisor from Brussels (or Berlin), the very idea provoked an angry political backlash in Greece.

In this negative political climate, it is entirely likely that Europe's new fiscal pact will not be ratified and will never come into force. Even if it does, many economists regard it as ineffective and possibly counterproductive. The hopes of European federalists that it will be the foundation for a much deeper political union also seem delusory and utopian, given the backlash against the whole European project across the EU.

If European political union is not a practical way out of this crisis, what is likely to happen? Two possible futures beckon. The first is that, like an unhappy marriage, the union persists--even though it is clearly not working. In this scenario, southern Europe undergoes years of austerity, which drives the economies of countries like Greece, Spain and Italy into a depression. While there can be no doubt that all three countries might ultimately benefit from the labor- and product-market reforms being forced through, the transition to a new economy could be long and painful. Youth unemployment in Spain has already reached 45 percent. Although the official figures may mask a lot of employment in the black economy, prospects for young people across southern Europe are bleak. Given these realities, the potential for political radicalization is obvious.

This leads to the second possible scenario. Under these circumstances, new political parties come to power across Europe--and break with the European project as currently constituted. To function, the European Union has required a political consensus among the governments of the major European countries (and frequently the minor ones as well, given the need for unanimity on many subjects). Consensus has been achieved through peer pressure and because almost all governments were in the hands of the Center-Left or the Center-Right.

In a new political climate, this pro-European consensus could well shatter, and core policies of the EU could be challenged and begin to unravel. The most obvious and important pressure point is the euro. A prolonged depression in southern Europe could lead to some countries deciding to pull out of the euro--and to repudiate their debts. Such a course would severely threaten the financial systems of the countries involved and risk a banking crisis across Europe. But desperate times may lead to desperate measures.

It is also likely that other agreed aspects of the European project (the acquis, in Brussels-speak) will come under challenge. Immigration, particularly from the Muslim world, has become a hot-button issue for many of the parties that also are hostile to the European Union. If the crisis spurs an increase in migrant flows within Europe at a time of rising unemployment, that would probably increase pressure on governments to withdraw from the EU agreement on the free movement of labor. Since the right to live and work anywhere within the EU is one of the Union's cherished "four freedoms," such a political attack would be a severe blow.

Another blow could come from the challenge financial pressure poses to free-market orthodoxy. This threat is likely to gather force in a depressed EU, which was constructed upon the foundational philosophy of a single market. If the French begin to subsidize basic industries again or restrict the activities of investment banks based in London--both of which are entirely plausible scenarios--the EU's powers would be under direct challenge.

What is unfolding in Europe is a tragedy of good intentions. For entirely honorable reasons, European leaders attempted to construct a political and currency union. For many years, this project advanced steadily, to the benefit of Europe and the world. But, faced with a severe economic crisis, the inherent flaws in the European project have been brutally exposed. Above all, the extremely fragile political legitimacy of the European Union has become apparent. Pace Chancellor Merkel, something called the EU will probably survive the current crisis. But even if it does, it will be a shrunken, diminished and chastened organization.

This article originally appeared at The National Interest, an Atlantic partner site. Follow @TheNatlInterest on Twitter.

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Gideon Rachman is the chief foreign-affairs columnist at the Financial Times and author of Zero-Sum Future (Simon & Schuster, 2011).

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