The European Union, like the U.S. under the Articles of Confederation, is an unworkable half-measure. To move beyond Greece-like crises, the EU needs “ever closer union.” (More)

Greece vs. Europe, Part III: “Ever Closer Union” (Non-Cynical Saturday)

This week Morning Feature follows the (non)negotiations between Greece and Europe. Thursday we saw how a debt crisis and depression became five-year case study in the politics of pain. Yesterday we explored why there are no good short-term solutions for the Greek economy. Today we conclude with Europe’s Articles of Confederation challenge.

“The great men are going to get all we have”

When Treaty of Paris secured independence in 1783, the infant United States faced a fiscal crisis. In New England, coastal merchants were deeply in debt to foreign lenders, who demanded payment in hard currency, who in turn demanded cash payments on loans to inland farmers. But those farmers lived largely on barter with their neighbors and didn’t have the cash.

Massachusetts Gov. John Hancock, a populist, did not prosecute delinquent tax cases and or force farmers to pay cash for debts, but local courts often seized farms to pay back debts. At a local farmers’ protest meeting, the aptly named Plough Jogger summarized his neighbors’ plight:

I have been greatly abused, have been obliged to do more than my part in the war, been loaded with class rates, town rates, province rates, Continental rates and all rates … been pulled and hauled by sheriffs, constables and collectors, and had my cattle sold for less than they were worth … The great men are going to get all we have and I think it is time for us to rise and put a stop to it, and have no more courts, nor sheriffs, nor collectors nor lawyers.

Jogger’s plight culminated in Shays’ Rebellion, but in Unruly Americans and the Origins of the Constitution, historian Woody Holton argues the roots of that uprising mirrored a national problem:

After 1783, Holton explains, the states faced colossal war debts on which the interest alone required more revenue than the colonies collected before independence. Most states resorted to regressive “direct taxes” on real estate and polls (only adult men). The main beneficiaries were speculators who had purchased government-issued IOUs from soldiers and war suppliers for a fraction of their official worth, then collected 6 percent interest on the full face value, yielding as much as a 30 percent annual return. That was a great deal if you could swing it, as Abigail Adams, Holton’s surprise speculator, understood. John, the future president, wanted to invest in land; not Abigail. Collecting interest was a lot less trouble than working land, and – though she didn’t say it – interest and capital gains weren’t taxed, while land was.

To add to the problem, a severe trade deficit in the mid-1780s drained the country’s gold and silver. The resulting deflation made it harder to pay private debts, which became, in real terms, larger than the original loans. Delinquents could see their farms auctioned off, then spend time in debtors’ prison. The rural population did not submit quietly. Throughout the country, farmers resisted tax collectors, forced courts to close (or burned them down) to prevent foreclosures and demanded paper money and tax relief.

Circumstances called for (in modern terms) a loosening of the money supply, and Holton argues that paper money was a reasonable response. Seven states printed currency (though only three made it legal tender for all debts), and every state provided some tax or debtor relief. The goal was to let people pay their taxes and encourage economic development, but the paper currency lost value in a few states, particularly Rhode Island, which tried to force creditors to accept it. To defenders of fiscal responsibility, Rhode Island showed what too much democracy produced: a situation in which only a fool would lend money to anyone.

In his book, Holton argues that the Philadelphia Convention was driven largely by wealthy elites seeking to secure their own property rights, including debts owed by those subsistence farmers. The Articles of Confederation firmly seated sovereignty in the states. There were no federal taxes, no federal courts, and few federal structures to limit states’ responses to populist demands.

The Framers, Holton argues, saw populism and democracy as threats not only to their own property but to the nation’s fiscal sustainability. The infant U.S. desperately needed foreign investment to stimulate growth, but why would wealthy Europeans invest in a nation where debts could be written off on the demands of mobs? In response, they fashioned a Constitution that curtailed democracy and local sovereignty in favor of a more powerful, more investment-friendly federal government.

In order to secure ratification, the Framers needed a carrot of human rights to offset the stick of fiscal responsibility. The carrot they offered was a package of amendments that we now revere as the Bill of Rights.

“They put themselves into an economic straitjacket”

This series and much of the week’s international news focuses on Greece, but the New York TimesPaul Krugman notes that the Eurozone’s problems are not limited to Greece:

It’s depressing thinking about Greece these days, so let’s talk about something else, O.K.? Let’s talk, for starters, about Finland, which couldn’t be more different from that corrupt, irresponsible country to the south. Finland is a model European citizen; it has honest government, sound finances and a solid credit rating, which lets it borrow money at incredibly low interest rates.

It’s also in the eighth year of a slump that has cut real gross domestic product per capita by 10 percent and shows no sign of ending. In fact, if it weren’t for the nightmare in southern Europe, the troubles facing the Finnish economy might well be seen as an epic disaster.

Krugman finds similar malaise in the Netherlands, Spain, and Portugal. Each nation’s economic struggles has unique roots, but their search for solutions faces a common obstacle:

What all of these economies have in common, however, is that by joining the Eurozone they put themselves into an economic straitjacket. Finland had a very severe economic crisis at the end of the 1980s – much worse, at the beginning, than what it’s going through now. But it was able to engineer a fairly quick recovery in large part by sharply devaluing its currency, making its exports more competitive. This time, unfortunately, it had no currency to devalue. And the same goes for Europe’s other trouble spots.

At Vox, Timothy Lee’s summary is even more succinct:

The euro, as it currently exists, is an economic disaster. And millions of people in Greece, Spain, and elsewhere in Europe are paying the price.

“It’s primarily a political project, not an economic one”

It’s easy to conclude, as Krugman does, that the Eurozone should never have been established. But that’s like concluding, in the mid-1780s, that the thirteen colonies should have become independent countries rather than the confederation of United States. Yes, the Eurozone has been an economic disaster … but the Eurozone was created as a means to an end, not an end in itself:

If you try to understand the Eurozone as an economic policy idea you’ll quickly start to see that it’s a pretty stupid idea. That will lead naturally to the conclusion that its architects were stupid people, and that the policymakers in Brussels and Frankfurt who oversee it today are also stupid people. And if you try to understand everything that’s going on through the lens of stupid people doing stupid things, you’ll end up misunderstanding the situation.

The single most important thing to understand about the Eurozone – the group of 19 European Union member states who use the Euro as their official currency – is that it’s primarily a political project, not an economic one. And despite the considerable problems with European economies, it gives every indication of succeeding in its political goal of pushing deeper and deeper integration of European countries.

The European Union evolved in response to centuries of Great Power wars that culminated in World War II. And while U.S. hagiographers like Tom Brokaw celebrate that war, in fact it was the deadliest manmade disaster in history. European integration was never intended to create merely a trading bloc with a shared currency:

But European Monetary Union isn’t a blunder, it’s an incredibly ambitious political idea. In the late-1940s and early-1950s, European leaders decided that World War II was not just a uniquely horrible event but the culmination of a centuries-long process of great power rivalry. They committed to the construction of a series of institutions – first the European Coal and Steel Community, then the European Economic Community, then the European Union – that would make war impossible. By integrating the steel industries of France and Germany, it would be impossible for either country to produce war materiel without the cooperation of the other. Deeper integration in subsequent decades only makes military hostility even more difficult.

The slogan underlying these efforts is “ever closer union” and the monetary union is a step toward that goal. And indeed while the past five years have been a time of economic trouble for members of the Eurozone, those very troubles have pushed the member states toward even closer forms of political and economic integration on subjects like budget discipline and bank regulation.

“Handing money to the Greeks”

Vox’s Matthew Yglesias explains that the Eurozone’s core problem is like trying to plan a dinner party with only one item on the menu:

There’s a simple solution to the Greek crisis, as economist Adam Posen explained to Ezra Klein:

The way we deal with this kind of problem in the US is we have fiscal transfers. Mississippi and Alabama never really pay back what they owe California and New York, and that’s okay. So you can see the crisis in Greece two ways: you can believe it’s a failure because the Greeks are reneging on their debts or because Germany is not treating Greece like the U.S. treats Mississippi, as a state they have to look after.
[…]
The Northern Europeans should write a check and make this go away. They should accept the fact that Greece is not going to pay most of its debts. They also need to accept that these debts are partly their fault. These loans were made by Northern European financial institutions, and the Northern Europeans should suffer for making stupid loans, too.

But that won’t happen. Northern European governments like Germany, Finland, Austria, the Netherlands, and Sweden don’t want their banks to lose money and they don’t want to tell their voters that they’re handing money to the Greeks.

“It has a lot of the responsibilities of a state [but not] the power of one”

That leaves the European Union with two paths forward. The first is to expel Greece, and then any other Eurozone country whose fiscal challenges don’t match the ECB’s German-centric policies. If your economy is growing while Germany’s is slumping, you can either deal with inflation and hot money as the ECB primes the fiscal pump for Germany … or leave the EU. If your economy is slumping while Germany’s is growing, you can either deal with the austerity-driven depression while the ECB keeps money tight for Germany … or leave the EU.

In the short term that’s an okay solution, especially if you think the European anthem should be Deutschland Über Alles. But sooner or later, every EU member will fall out-of-step with Germany. How many EU members can Germany expel before the EU project collapses entirely?

The better path is for the EU to the “ever closer union” at the heart of the European project:

There’s a tension in the way that the European Union is set up. It has a lot of the responsibilities of a state, such as managing migration and trade policy, and some of the institutions of one. But it doesn’t have the power of one, and that tension is part of how the Greece debt crisis got so bad.

The vast majority of spending in Europe is done by individual countries rather than by the EU as an institution. There’s a common EU policy on sales taxes, but those taxes are still collected by member states. There’s a joint European defense policy and a European peacekeeping force, but no European military.

Like the infant United States, the European Union has an Articles of Confederation problem. And like the infant U.S. the solution is a constitution that creates a real European government:

A lot of these problems would be mitigated if the EU reformed its institutions so that it was more like a big centralized government. A sufficiently powerful European Parliament could, with the mandate of the voters that elected it, adopt a Europe-wide tax policy, create Europe-wide social welfare programs, and unify its member governments’ militaries into one pan-European force. This would clarify the EU’s role, and give it real democratic legitimacy.

The end result could look something like the United States. Some things would still be province of national governments: France would handle its own schools, Romania would have its own police. But the big stuff – regulation, the social safety net, the military – would be controlled by the federal European government.

Yes, that would mean less local sovereignty for member nations, and there will be “states’ rights” dissenters in Europe, just as there are here. Indeed because Europe includes so many distinct cultures, those debates might be more fractious than in the U.S. But the alternative is to limit the Eurozone to nations whose economies happen to fit Germany’s, and admit that the “European Union” is really just a Fourth Reich.

Like Shays’ Rebellion, the Greece crisis has made the Eurozone’s structural problems impossible to ignore. The question now is whether Europeans can muster enough trust to call a Philadelphia Convention.

+++++

Happy Saturday!