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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.

France has pursued a policy of harnessing Germany’s economic muscle to further its political ambitions, and Germany has for the most part been happy to let a succession of arrogant and posturing French leaders, of whom Nicolas Sarkozy is the latest, hog the limelight. Pundits like to say that Europe is led by German racehorse ridden by a French jockey cracking the whip of war-guilt; not only is it a great line, it’s an uncannily instructive description of the relationship.


Europe is a complex web of overlapping and conflicting interests, but these days it’s essentially a statist racket propped up by ever-less-sustainable borrowing; the latest wheeze to placate the bond markets is a jaw-droppingly foolish commitment to private bondholders that they won’t incur losses as a result of countries defaulting on their debts.

There are all kinds of scenarios for how the crisis will play out, and none of them end well. Last week’s agreement may not see the light of day in its present form — several governments are consulting their parliaments and some, such as Ireland, have indicated that they may put the deal to a referendum. (This is flirting with danger: Greek Prime Minster George Papandreou was forced out by “Merkozy” and the technocrats for threatening to put the latest bailout plan for his country to the people. It’s enough to make one nostalgic for the days when Europe’s leaders at least allowed referendums to take place, and simply ignored the result if it didn’t go their way.) Governments and leaders are likely to fall, whether kicked out by their austerity-weary electorates or, as in Italy and Greece, led away by the men in white coats from Brussels.

Whatever the outcome, millions of Europeans, particularly in the southern states, are being condemned to decades of high taxes and high unemployment, while having to work longer than they’d expected for reduced pensions and enduring swinging cuts to public services. But all the while the elites will keep pressing for ever-closer union — assuring their citizens that however bad things seem now, they’d be worse off outside the eurozone. British Foreign Secretary William Hague’s warning, made when he opposition leader back in 1998, that a European single currency area would become “a burning building with no exits,” has been thoroughly vindicated.


In the U.S., meanwhile, there’s growing concern both over the level of banks’ exposure to European debt, and the prospect of a default or another credit rating downgrade on the continent causing a new credit crunch and plunging the country back into recession. But whatever the immediate consequences, the crisis engulfing Europe might at least help to persuade Americans that they need to step back from the edge of the statist abyss to which President Obama has led them.

The crisis engulfing Europe is the supreme indictment of the centralized, big government, welfare state model. And yet this is precisely the direction in which Barack Obama, should he win a second term, wants to take America (a bailout for California, anyone?). While looking to the U.S. as an approximate organizational model, the European elites would like their United States of Europe to have rather less democracy and accountability than currently prevails on the other side of the Atlantic. But if Obama gets his way, the U.S. of A. could in a few years be indistinguishable from the U.S. of E.

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