The four reasons calling for a political union in Europe

2011-07-30

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Time is running out for the euro. Image Source: MASECO

The unprecedented economic crisis the EU is currently experiencing has exposed the weaknesses of the euro. The pressures that are being accumulated and the continuous mistakes of European leaders have brought the euro to a critical point, were the possibility of its collapse can no longer be ruled out.

Contagion was never contained by the policies of European leaders, since they massively failed to understand the very structure of the crisis. They failed to realize that the crisis is systemic. This failure made them believe that by adopting narrow measures that would address the first signs of the crisis in certain member-states would be enough to solve the problem. Events have proven the ineffectiveness of these policies. The fact is that under the current structure of the euro such policies will never solve the crisis, but will worsen it instead.

The only way to save the euro is to make audacious steps towards a political union. The forbidden “f” word in European politics (the word “federation”) must finally come to the foreground if things are to change for the better. The continuous denial of the need to integrate further is the single most important political obstacle in effectively dealing with the challenges of the crisis. Further integration towards the formation of a political union (in a federal way – not today’s “political UFO” structure) is the only viable option and there are four reasons why that is true.

The first is that the euro zone is not an Optimal Currency Area (OCA), i.e. it does not satisfy the criteria that would allow it to create a single currency upon solid foundations. In the euro area, there generally is little movement of labor (with few exceptions), economies have many differences between them with respect to their structures, a mechanism for the redistribution of surpluses (fiscal transfers) that would prevent asymmetric shocks does not exist. The exact opposite should apply for some of the main criteria of the OCA to be satisfied.

Second, EU does not have a single supranational agenda resembling that of sovereign state. There is no single budget, no single corporate tax policy, no single competition law. Now the euro area is comprised of 17 states each with its own fiscal policy, its own budget and its own tax and competition policies.

The third reason is that the constituent states of the euro, the once “two-speeds” of the core (surplus countries) and the periphery (deficit countries) are constantly diverging. Now there are increased pressures for France who is a surplus country, to become a deficit country due to its exposure to the South’s debt and due its own structural problems of high sovereign debt. This increasing divergence makes the “one-size-fits-all” policy of the euro even more problematic that it now is.

The fourth and final reason is that the deficit countries are going through a downward spiral that worsens their crisis, thanks to the inability of the EU to respond consistently to the crisis and due to the very structure of the bailout packages that are permeated by the mentality of punishing their recipients instead of helping them.The strict austerity measures that the bailout packages bring along, have catastrophic implications on the real economy and only succeed in making the crisis worse and in making solvency even more difficult.

Out of these four it becomes evident that the euro will either break up in a controlled way, or in chaos if things stay as they are. Now is the time for leaders. Time for those who have the courage to make the step further towards political integration. European leaders are now standing at a historic crossroads. Either to choose further integration which will keep the European dream alive, or cling to their short-sighted policies that will prolong the current stalemate and will most probably lead to the disintegration of the euro and the collapse of what took decades to build.