Eurozone: Failing Statists Prescribe...More Statism

American conservatives currently fretting about the possibility of having to vote for a Republican presidential candidate who is, in their opinion, less than perfect would do well to pay attention to the latest developments in Europe -- it should work wonders for concentrating the mind.

Last week's umpteenth deal to “save” the eurozone, the group of 17 European Union nations that use the single currency, paves the way for closer political integration between states; national budgets will henceforth be subject to scrutiny by eurozone officials, which rather undermines the whole idea of national politics and democratic elections. It provides a timely reminder that once you pass a certain point along the road to ever-bigger government it's impossible to turn around, and the answer to every problem becomes more centralization, more bureaucracy, and less freedom.

While British Prime Minister David Cameron's decision to opt out of the agreement grabbed the headlines, what's getting less attention, as Soeren Kern noted here a couple of days ago, is the fact that the new “fiscal compact” does little to tackle the immediate debt crisis, and even less to address the underlying causes of the continent's problems.

The key financial elements of the agreement -- limits on deficits, with unspecified sanctions imposed on countries that exceed them -- are meaningless. There's little reason to believe that after decades of profligacy countries will suddenly, magically, begin to balance their budgets, or that if they fail to do so they'll be caught. Nations cooked their books to meet the entry requirements for the single currency, and carried on cooking them for years to create the illusion that all was well.

But none of this should come as a surprise. Europe's leaders have never shown much interest in finding real solutions to economic problems; indeed the flaws in the single currency that have brought Europe to the brink of catastrophe were built in from the start.

The creation of the eurozone locked together two utterly incompatible groups of countries: broadly speaking, the more-productive northern states, primarily Germany, along with The Netherlands, Finland, and others; and the less-productive southern states -- Italy, Greece, Portugal, and Spain. In the absence of exchange rate flexibility, there have to be mechanisms for transferring wealth from the better-off areas to the poorer ones. These mechanisms are taxes (wealthier areas contribute more, poorer areas less) and benefits and subsidies (wealthier areas get less, poorer areas more).

In order for such a system to work, however, you need a high degree of political integration. And even then, if the imbalances become too great, as is the case in Europe, you need to impose a degree of austerity on both parties -- at a minimum, higher taxes on the more-productive areas and cuts in benefits and services for the less-productive areas. Europe's situation isn't helped by the need to fund generous welfare provision.

People tend not to vote either for higher taxes or austerity, so ever-greater centralization of power, with an attendant diminution of democracy and accountability, becomes necessary. And that is what Europe's political elites have been after all along.

Nevermind that this latest agreement merely kicks the continent's problems down the road for a few months, or that nations have agreed to surrender a large measure of sovereignty to the technocrats of Brussels (the Belgian capital is the administrative center of the eurozone and the EU). This agreement is all about saving the euro, which in turn is the key mechanism for advancing the greater political project that is closer European integration, leading ultimately to a federal system along the lines of the United States.

Europe has become the ultimate too big to fail enterprise, and therefore the solution to every new setback, every looming default, is closer integration -- or in the words of German Chancellor Angela Merkel, “More Europe.” Long before Rahm Emanuel articulated the strategy, Europe's elites were aware that every crisis presents an opportunity. The flaws in the eurozone are a feature, not a bug.

Over the years there have been many different drivers of the European project, with different motivations. The most consistently enthusiastic proponents have been technocrats and bureaucrats, and their disdain for democracy and enthusiasm for grand schemes has often chimed with the interests of progressive and leftist politicians. But many right-of-center politicians have gone along for the ride -- some, like Britain's Margaret Thatcher, because they thought they could enjoy the economic benefits while keeping the grand ambitions of the federalists in check, others simply because they fear the consequences of being left out.

The two biggest players, however, Germany and France, are motivated primarily by national considerations that transcend party politics. France, a nation steeped in delusions of grandeur, has always seen itself as the “natural” leader of the continent, at least until the emergence of a reunified Germany. For its part, Germany, given its industrial might, could leave the eurozone tomorrow and prosper, but feels an obligation to the rest of Europe on account of its unfortunate history of starting continent-ravaging wars.