"Not as Long as I Live"

The European Union has reached its crunch point. It is very reminiscent of the American colonies under the Articles of Confederation. The loose EU federation is not working and there is a real and profound division among European leaders about how to fix the problem.
Germany is leading the way, refusing to agree to tighter integration meant to solve the short-term problems related to the banking and fiscal crises now occurring. France, which was a firm partner of Germany in the period when the EU was formed (both under Socialist French president François Mitterrand and under the conservatives Jacques Chirac and Nicolas Sarkozy), is now leading the opposition to Germany’s views.
Nothing could be more dangerous for the EU and for its currency, the Euro, which was adopted 10 years ago without the complete integration of the Eurozone that would have made it work.
Let’s take a look at what’s going on.
Eurozone banks are in debt, largely either because of real estate busts or because they have been buying the government bonds of EU countries which now do not have sufficient funds or the expectation of tax revenues sufficient to pay off their debts to bondholders. Since the EU banks do not have enough capital put aside to cover the debt, they are asking the Eurozone and its partners, the European Central Bank and the International Monetary Fund, to lend them sufficient funds to cover their outstanding debt.
France and most of the rest of Europe are willing to lend the money needed, i.e., the bailouts, but Germany says, “No.”
The instruments most often recommended to provide the bailouts for EU banks are Eurobonds. These do not exist now. They would be created and sold by the ECB and the proceeds would be made available to EU banks and countries in debt.
The Eurobonds would be guaranteed by the EU collectively. That means that the interest rate for borrowing would come down for debtor countries like Spain, Italy and Greece, but borrowing costs would rise for countries like Germany or France or Great Britain. This is because the interest rates demanded by lenders who would buy Eurobonds are presumed to become an average of the current interest rates of all EU countries.
This is the sticking point. Germany has low interest rates, has spent a lot of money already to buy the government bonds of debtor EU countries (estimates are in the range of the equivalent of 1 Trillion US Dollars) which are now sitting in the German central bank and other German banks as loans that may never be repaid.
What Germany wants is a slow and methodical process leading to banking, fiscal and political union in the EU. The other countries say there is no time for that because the current crisis is going to destroy the Euro, and perhaps the EU, before it would have time to go slowly to such integration.
Let’s look at these three items.
Banking integration would mean that EU banks would be regulated by a single agency, which could close failing banks, demand capital set asides, and oversee all the banks in all EU countries. Germany is not willing to do now this because her banks are much stronger than the others. Great Britain, which has never taken on the Euro, is also opposed because it will not give up its banking sovereignty in the form of the Bank of England.
Fiscal integration would mean that EU countries would be regulated by a single agency that could oversee their taxation policies, demand budget cuts and changes if a country is too much in debt, and take away much of the power of each EU country’s central bank. Germany and France and Great Britain are opposed because they want to protect their sovereign control over their own fiscal policies.
Political integration would mean that all EU countries would give up a large chunk of their sovereignty to become states, in the American sense of that word, of a federal Europe that would control all their political activities. This is a real no-go for most EU countries right now.
Back to the Articles of Confederation and America in 1787-89.
Each state could issue its own currency - like EU countries today.
The US Central Bank did not exist as we know the Federal Reserve today - same as in the EU now.
Each state was responsible for its debt, even the debt incurred during the Revolutionary War on behalf of all the colonies’ fight against England. Ditto the EU today - there is no war debt but EU countries have debt at varying percentages of their GDP and many have no hope of ever repaying it.
In America, there was a solution. The states came together and drafted the Constitution. It formed the federal government with states retaining powers not specifically ceded to the federal government in Washington,
This allowed President Thomas Jefferson, for example, to “buy” all the states’ debts and repay them over time with federal funds earned by selling US bonds. In the EU, this is the fiscal question that Germany says it will not agree to.
Why was it so relatively easy for the America of 1789 to come to the solution that the EU is incapable of finding today?
For me, the answer is rather simple.
The America of 1787-89 was English - common culture, common language, common ideals, common ideas about morality, common history in the Revolution that bound them together against England. They trusted each other and were led by men of exceptional vision and integrity.
The European Union of 2012 is anything but common - 27 different countries with their own unique languages, cultures, histories (often including wars with one another and long-felt animosities), different currencies, and no sense of a common goal, except to save their skins against the international financial wolf at their door. And, although Angela Merkel is a serious and determined leader trying to do the right thing, there is no real EU leadership.
As an aside, I believe that the America of 2012 looks more like the EU of today than the America of 1789, and that is why we have political gridlock in Washington.
That is what is wrong with the EU and the Eurozone. It will not be solved by treaties or integration or anything else. It is doomed to remain a loose federation no matter how it is described on paper in treaties.
Europe needs to sit down and reconsider the basic elements of the EU and find the lowest common denominator that could hold it together in some way.
This will probably break open the experiment and take it back to its original goal - a customs union that makes the free flow of goods and services possible without any one European country trying to get the upper hand commercially, except by making and selling better goods and services.
Germany and Great Britain know this instinctively. That is why they are opposed to banking, fiscal or political integration.
That fully explains what German Chancellor Merkel is reported to have said about Eurobonds and complete integration in a private German parliamentary meeting yesterday: “Not as long as I live.”