Castles in the Sky: The Fundamental Problem with Efforts to Save the Euro

An Essay by Michael Sauga

Part 2: Pursuing the same old Illusionary Policies

Photo Gallery: Europe's Common Currency Facing Uncertain Future Photos
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It would have been better if he had listened to politician and sociologist Ralf Dahrendorf, a member of the European Commission from 1970 to 1974. A great proponent of European unity, Dahrendorf was strongly opposed to a unified economic and fiscal policy, even though the EU consisted of only about a dozen Western European countries in the late 1990s. At the time, Dahrendorf felt that the economic cultures of the member states were "too different" for a shared economic policy.

Today the EU has almost twice as many members, and the euro zone itself is a sizeable collection of nations. It stretches from Cabo da Roca in Portugal to Tallinn in Estonia, and it unites such varying economies as tourism-centric Slovenia and industrial giant Germany, the stability-oriented Netherlands and Italy with its notorious inflationary problems. A strict set of rules is not well suited to such a colorful club, prompting Dahrendorf to warn against "chasing chimera" in European monetary policy even before the launch of the euro.

His successors are apparently determined to do just that. To safeguard Europe's currency, they are pursuing the same illusionary policies as they did when the euro was introduced. There is talk of a stability pact once more, and again it is governments and not independent authorities that would rule on possible sanctions. Allowing the perpetrator to perform the role of judge isn't exactly a code that guarantees independent decision making.

The "Divisiveness Pact"

Chancellor Merkel has also worked out a new competition pact, which would pursue reforms of wages, pensions and taxes across national borders. The agreement is for the most part not legally binding, the German chancellor pointed out before the summit. Nevertheless, her European counterparts removed virtually all concrete requirements from the text, ensuring that the supposed pact would not commit any European leader to anything. This prompted the London-based Economist to derisively dub it the "divisiveness pact."

Even die-hard proponents of integration are now convinced that this is not the way to promote progress in Europe. Former European Commission Presidents Jacques Delors and Romano Prodi, as well as ex-Belgian Prime Minister Guy Verhofstadt, call the plans for a competition pact "ineffective" and say that they will "not produce any results."

They recently announced their own proposal, which is indeed of a different caliber. If this experienced trio of European politicians had its way, the Commission would have the power, in the future, to impose strict rules on member states with regard to retirement age, corporate taxes, wages and R&D expenditures. They propose adding new EU commissioners to monitor compliance with these rules and impose penalties when national governments fail to cooperate. The European Commission needs to finally get "access to economic policy," the authors write, to enable it to force Europe onto "the path of convergence."

This sounds like a clear concept, but it is also reminiscent of Gosplan, the central state planning committee of the former Soviet Union. The European Commission has already introduced a strict regimen of quotas for products like light bulbs and biofuel, angering many consumers. Under the concepts devised by Delors, Prodi and Verhofstadt, the principle would be applied to virtually the entire economy. It would be a sure-fire way to further increase the public's disenchantment with Brussels.

Preventing Sanctions being Imposed

It is an affliction of European policy that its protagonists in the national governments are generally split personalities. They call for a unified economic policy, and yet they refuse to cede any power to Brussels. They demand penalties for debt sinners, and yet they prevent sanctions from being imposed. And they invoke the European spirit while stubbornly pursuing national interests. Udo Di Fabio, a judge on Germany's Constitutional Court in Karlsruhe, speaks of "conceptual limits that can in fact only be exceeded by taking a spirited step in the direction of the federal state."

But neither governments nor citizens are prepared to take such a step. As a result, the center of power in Brussels is distancing itself from the needs and perceptions of its base. European politicians are still pursuing a path to integration that citizens have long since abandoned.

Since the euro crisis gripped the continent, this divide has grown even more. The political union of Europe is now no longer seen as the distant goal of a few dreamers in the European Parliament in Strasbourg, but as a requirement for the survival of the common currency. Politicians in capitals across the continent are asking themselves: Can the euro survive if there is no EU-wide economic and fiscal policy?

For the architects of the European common currency, the answer was obvious. They were convinced that each country had to be responsible for its own debts, or else the common currency would amount to an open invitation to get rich at the expense of others. This attitude explains the response made in the early 1990s by Horst Köhler, then a secretary of state in the Finance Ministry and later the German president, to the question of whether a euro country could go bankrupt: "Why not?"

After the Lehman Brothers bankruptcy, having this much confidence in the traditional principles of the market economy was considered outdated. Preventing the insolvency of an important bank or a member of the euro zone became standard policy worldwide. Governments were determined to ensure that the bankruptcy of a large borrower would not bring down the entire financial market with it.

As long as the banking world was in flames, the large-scale bailouts of borrowers and lenders were justifiable. But part of the idea of putting out a fire is that it remains the exception and not the rule. The public cannot be convinced of the value of ongoing bailouts at taxpayer expense, which eventually become a threat to the rescuers themselves.

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1. Key: Bankers doing better
lakechamplainer 03/30/2011
The key to this whole story about the Euro zone and the rescue packages is: the banks are doing better. Kind of reminds of the US, where "the rich" and "the banks" are likewise doing fine after trillion dollar plus bailout, regular people not so fine.
2. Rather than set aside ever higher sums for bailouts...
joe sixpack 03/30/2011
---Quote (Originally by sysop)--- In the battle to save its*common currency, Europe is*too busy*focusing on the*same old*failed policies. Rather than set aside ever higher sums for bailouts, the bloc needs to set up an independent institution to oversee the debts of EU nations. http://www.spiegel.de/international/europe/0,1518,753509,00.html ---End Quote--- ...the bloc needs to discuss if Greece really should be a member of the Euro club. Same for Ireland and the rest of the PIIGS.
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