After the Second World War, European countries, still reeling from the war’s devastation, sought to avoid another tragedy by establishing some sort of economic interdependence. In 1958, Belgium, Germany, France, Italy, Luxembourg, and the Netherlands created the European Economic Community (EEC). In 1993, the name changed to the European Union and, by 1999, when the Euro launched, there were fifteen member states, tied together by provisions in the Maastricht Treaty. Now, there are eighteen.
The members of the EU join a monetary union headed by European Central Bank (ECB). It is a single entity in charge of setting interest rates for the whole Eurozone, a community of eighteen countries with vastly different growth, debt, and employment rates. It is the only central governing entity of the EU. Meanwhile, the member states have their own, distinct governments and maintain national sovereignty. The EU is directed by rule of law—treaties, voluntarily and democratically agreed upon by all member countries. It is an unprecedented experiment in globalization. But it’s not working.
Setting single interest rate for distinct and independent economies meant that some needs can’t be met. It was set low because powerful countries like Germany had low growth, but too low for expanding economies like Ireland and Spain for whom low interest rates led to a housing bubble. In giving up independent monetary policy and control over their own currency, countries give up control over monetary policies meant to control debt, like raising the inflation rate to reduce the debt burden, depreciating its currency to promote exportation, and quantitative easing methods to avoid defaulting on loans.
The international community from whom the countries in the EU were borrowing lowered their interest rates, allowing Greece to borrow at a lower interest rate, one closer to Germany, assuming the Eurozone was “in it together.” The Maastricht Treaty set forth some common debt rules to counteract irresponsible spending. However, they were ineffective and unenforceable. The high-debt, weak economy countries increased importation with the extra loans while high labor costs decreased productivity. In 2008, the global financial crises hit and international loaners doubted whether the high-debt countries would be able to repay their loans. Low productivity plus high importation left them with huge trade deficits, while borrowing costs rocketed up again, leaving those countries (Greece, Portugal, Ireland, and Spain) with huge government and private sector debt and no control over their monetary policy to get rid of it. The increased taxes on the struggling economies couldn’t keep up.
In 2010 and 2011, the EU bailed out Greece for 110 billion euros, Ireland for 85 billion euros, Portugal for 78 billion euros, and Greece again for 109 billion euros. With no central governing body and individual countries with their own nation’s borders priorities in mind, deliberations over the emergency rescue plans were complicated and slow, leaving the international community with weakened confidence in the EU. The Eurozone is struggling to recover.
The question becomes—what to do? The original treaty contained no mechanisms for dealing with financial crises and following arrangements were hastily made and slap-shod. The Maastricht Treaty has no provisions for exiting the EU, willingly or not. Arguments vary from forcing Greece from the Union to Germany to dissolving it entirely. In the New York Times, Paul Krugman has put forth four hypotheses: “1. Greek euro exit, very possibly next month. 2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany. 3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals. 3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing. 4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or: 4b. End of the euro.” But there are also ideas beyond forcing struggling companies from the EU.
In an interview, Thomas Picketty said, “The existing institutions can no longer cope with the effects of globalization. The IMF and the World Bank are insufficient to deal with the problems created by globalization. If we want to have a regulated globalization that benefits the majority of people, then we need closer political and fiscal cooperation. The European Union has clearly failed to deliver the kind of regulation we need. The institutions need to be fundamentally restructured.” Efforts have begun. In 2013, German economists of the Glienicker Group made proposals for strengthening the EU. They included a “robust banking union” capable of “making creditors accountable” so the costs of irresponsible borrowing and spending of the private financial sector wouldn’t be outsourced to the countries’ people through unsustainably high tax rates and force the rest of the EU into giving a bailout; increased mobility through the euro-area, so laborers could go where they were needed; “common foreign and security policy,” collaboration on security in the digital age; and a new “Euro-treaty.” The lack of a “European executive” has forced the role on the ECB, whose priority is the preserving the currency, not the standard of living in the various member states. In an article for The Guardian, “Our Manifesto for Europe,” Thomas Picketty urges the Group beyond a treaty to a higher governmental body and beyond holding individual countries responsible for their debt to pooling it into one European debt. “Alone, each country is hoodwinked by the multinationals of every country, which play on the loopholes and differences between national legislations to avoid paying tax anywhere. National sovereignty has thus become a myth. To fight against this “tax optimisation”, a sovereign European authority needs to be given the power to establish a common tax base that is as broad as possible and strictly regulated.” This European authority, a parliament, would be based on “a simple principle: one citizen, one vote.”
There are worries that a united government of Europe would be run by the more powerful countries in the EU, like Germany, while the smaller members are drowned out. A centralized government certainly would restrict national sovereignty, leaving national government to deal with smaller issues as it takes on the big ones like financial regulation. It will also eliminate competition between the independent countries—“In Europe there still exists tax competition to attract citizens, companies, and investments. Countries cannot increase taxes too much, because people and capital can easily move to other EU countries. The possibility of voting by foot — exiting countries with higher tax burdens — is an important guarantee for individual liberty. The EMU drifts toward centralization and economic government thereby eliminating tax competition and making voting by foot more costly. Once harmonization is reached, taxes and regulations will probably increase. So staying with the EMU comes with this important risk for individual liberty — maybe the most important European value.”
But the Eurozone is unique. The European Union and the EEC before it have overseen nearly fifty years of peace after the most devastating war in human history. To dissolve it would be a step backwards. It could be the future basis of the global economy. However, its reliance on the quickly-becoming-outdated idea of national sovereignty and independence is stunting its growth. To succeed, the EU needs to cooperate. Thomas Picketty wrote in The Guardian, “A single currency with 18 different public debts on which the markets can freely speculate, and 18 tax and benefit systems in unbridled rivalry with each other, is not working, and will never work.” Something needs to change. Maybe success will come at the cost of homogenization and a loss of liberty, but it might be worth it.