Europe's Path to Disunity

Hans-Werner Sinn
Project Syndicate, 23 Okt 2012

MUNICH – the motto of the United States of America is: “E pluribus unum” (Out of many, one). The European Union’s motto is “In varietate concordia,” which is officially translated as “United in diversity.” It is difficult to express the differences between the US and the European model any more clearly than this. The US is a melting pot, whereas Europe is a mosaic of different peoples and cultures that has developed over the course of its long history.

That difference raises the question of whether it is worth striving for a United States of Europe – a concept that many refuse to accept, because they do not believe in the possibility of a unified European identity. A single political system like that of the US, they insist, presupposes a common language and a single nationality.

Perhaps the idea of a United States of Europe, the dream of post-war children like me, can never be realized. But I am not so sure. After all, deeper European integration and the creation of a single political system offer solid, practical advantages that do not require a common identity or language. These advantages include the right to move freely across borders, the free movement of goods and services, legal certainty for cross-border economic activities, Europe-wide transportation infrastructure, and, not least, common security arrangements.

Banking regulation is the most topical area in which collective action makes sense. If banks are regulated at the national level, but do business internationally, national regulatory authorities have a permanent incentive to set lax standards to avoid driving business to other countries and to lure it from them instead. Regulatory competition thus degenerates into a race to the bottom, since the benefits of lax regulation translate into profits at home, while the losses lie with bank creditors around the world.

There are many similar examples from the fields of standards, competition policy, and taxation that are applicable here. So, fundamental considerations speak for deeper European integration, extending even to the creation of a single European state.

The danger of following such a path always lies in the fact that collective decision-making bodies not only provide services that are useful to everybody, but also may abuse their power to redistribute resources among the participating countries. Even democratic bodies are not immune to this danger. On the contrary, they make it possible for majorities to exploit minorities. To counter this threat, democratic bodies invariably need special rules to protect minorities, such as the requirement of qualified majority voting or unanimous decision-making.

The decisions taken by the European Central Bank are a particularly dramatic example of this problem, taken as they are by a simple majority of a body that is not even democratically elected. The ECB’s decisions lead to a massive redistribution of wealth and risk among the eurozone’s member states, as well as from stable countries’ taxpayers, who have little stake in the crisis, to global investors directly affected by it.

The ECB has been providing virtually all of its refinancing credit to the eurozone’s five crisis-stricken countries: Italy, Spain, Portugal, Greece, and Ireland. All the money circulating in the eurozone originated in these five countries and was then largely used to buy goods and assets in the northern member countries and redeem foreign debt taken from them.

The US Federal Reserve would never be allowed to conduct such a regionally imbalanced policy. The Fed cannot even provide credit to specific regions, let alone states on the verge of bankruptcy (for example, California).

And now European Council President Herman Van Rompuy, backed by most of the troubled eurozone countries, is again proposing Eurobonds and debt-mutualization schemes. These ideas go well beyond the American system. The kind of fiscal integration and centralized power that they would require do not even remotely resemble those in place in the US.

Van Rompuy’s proposals are extremely dangerous and could destroy Europe. The path toward a union based on joint liabilities, against the wishes of large parts of its population, is not leading to a federal state in the true sense of the term – that is, to an alliance of equals, who freely decide to unite and promise to protect each other.

Nor can this path lead to a United States of Europe, simply because a large part of Europe refuses to follow it. Europe is not identical with the eurozone. It contains many more countries than those that use the euro. As useful as the euro could be for Europe’s prosperity if its obvious flaws were corrected, the way that the eurozone is now developing will split the EU and undermine the idea of unity in diversity.

The assertion that the eurozone could be transformed into a United States of Europe is no longer convincing. The path toward joint liability is far more likely to lead to a deep rift within Europe, because turning the eurozone into a transfer and debt union that can prevent the insolvency of any of its members would require more central power than currently exists in the US.

Copyright Project Syndicate -