Our subject is “The Feasibility of European Monetary and Fiscal Policies” What does a topic like that mean? To me it implies that Europe’s present economic policies might not be feasible. Feasible for what?
For sustaining the kind of political economic structure that we have grown up imagining that most of Europe ostensibly wants – i.e. a European Union: in its economic dimension, a common market with a common currency Why today does the feasibility of Europe’s policies for achieving and sustaining this Union seem a big issue? Because we are coming to suspect that the European continent is not a natural union, political or economic.
Economically, for example, it is not that what we would call an “optimal currency area.” To have a monetary union in Europe is not a natural outcome of free markets. Instead it requires a positive act of collective political will. For example: a “stability and growth pact” – to make a disparate aggregate of states behave more like a single state. It is art prevailing over nature. Where can this will to unify base itself?
An obvious answer is in a federal government. That is, after all, how we have done it in America. The United States is not an optimal currency area and it took a civil war to give us a central government strong enough ultimately to make the country a monetary union. Even today as we look across our country to California, we notice that our own stability and growth pact is not natural, and indeed seems more than a little shaky.
But of course Europe as a continent is, in most respects, far more diverse than we are, culturally, linguistically, institutionally. For most of its modern history, Europe has been pretty resolutely divided into separate states. Since the late 19th and early 20th centuries, most of Europe’s states have been nation-states, which has made them even more distinct and divided among themselves. The policies of Europe’s states have most of the time been dominated by mercantilist ideas – featuring histories of protectionism rather than free trade, with separate national currencies, often strictly controlled. Europe’s states traditionally manipulated their currencies as weapons in trade, which they saw as a zero-sum game among themselves. This line of thinking should remind us should remind us that there is not much that is natural, let alone inevitable, about European economic integration. When it is achieved – as it has been to a very considerable degree in recent times – it represents the triumph of art over nature and of political economic idealism over actual economic habits.
Where does this idealism for unity come from? Politically, it still reflects the determination of postwar French and German elites that they must never again go to war with each other, a conviction that is the product of the horrendous trauma that each has repeatedly inflicted on the other. Beyond, there is a shared realization that neither will count for much in a world of old and new superpowers unless they act in collaboration. This abhorrence of any return to fraternal warfare have been widely shared among other West European countries.
There is also, of course a strong economic motive for European integration. It is not so different from the political motivation. Europeans realize they must collaborate to preserve their rank and prosperity in a world of rapidly evolving giants. These sentiments are still widely shared among Europeans but we now sense that they are by no means automatically or necessarily predominant, particularly among the newer members of the EU from the East.
With the opening of the East, European states are more distinctive and divided than ever. This means logically that the political will to sustain integration must, to succeed, be stronger than ever. But unlike the early United States, Europe has not created for itself a federal government to overcome its divisions. Instead, it has so far chosen a confederal construction – one that preserves and strengthens nation states within a larger union rather than dissolves them into a new single entity. And so it is not surprising that our question should be the feasibility of Europe’s being able to achieve the ends it presumably wants, within the structure it continues to employ. If there is not to be a central federal power for Europe – parallel to the American constitution – will there be much of a Europe at all? Can states that retain so much of their sovereignty expect to sustain any effective form of Union?
It is important to recognize that there are positive as well as negative answers to these questions. In other words, there is perhaps more to be said for Europe’s confederal model than we — from our American perspective — are willing to admit.
One such illustration comes from the monetary sphere itself – there was at least one prolonged period when European states did manage collectively a stable and successful monetary union, arguably without a federal structure or a single hegemonic power. I refer to the Gold Standard that evolved in the 19th century and lasted until WW I. The great financial centers of the world – London, Paris, Berlin, Vienna, St. Petersburg, New York did keep themselves in balance. They did follow rules that made it possible to keep that balance – what amounted to an early Stability and Growth pact. In crises, the major centers did sometimes actively cooperate in the general interest – as when the Bank of France on occasion quietly bailed out the sometimes overextended bank of England. This model of enlightened but voluntary monetary cooperation was destroyed forever by WWI – a time when Europeans threw aside any pretension to impose on themselves rational self-restraint in the common interest. After the great madness of 1914 came the renewed insanity of 1939.
Arguably, Europe has never really recovered from these 2 great wars. Indeed, Europe came close to destroying itself, a lesson that we can hope France, Germany, and the rest of Europe have not forgotten. Similarly we can hope that today’s world offers sufficient evidence of how vulnerable it is to be a rich but divided and therefore weak Europe. We can hope that the world today appears dangerous enough to dampen any serious rebirth of old-fashioned nationalism on the part of the Germans, the French, or even the British.
Let me close with a few further observations about our American idea of continental federalism and how it contrasts with that of the Europeans. When we Americans and many Europeans look at Europe’s federal model, we note, as I have been saying, its lack of a strong federal central power. And therefore we tend to see Europe’s Union as an early and incomplete or perhaps failed version of our own model. Our own history teaches us to see things in this way whereas Europe’s history suggests a different perspective. European states have struggled for centuries to prevent the rise of a dominant central power. As an example, we might look at Europe’s monetary union. Europeans might really have, at the outset, preferred to stop their monetary integration with a reinforced EMS; rather than a single currency. They could not do this – they were compelled to go on to a single currency, we might say, because they lived in a world system dominated by the dollar. To protect themselves from the thrashings of that dollar – instabilities brought on by the erratic nature of America’s policies – in turn dictated by America’s overextended economy – Europeans had to create the euro. Monsters, we might say, beget monsters.
Where does this line of thinking take us? Well, for a long time it seemed natural for us to see the world as a kind of giant version of the early United States with today’s United States the powerful center of a nascent global federal system. This view was greatly strengthened, of course, by the collapse of the Soviet Union. There had been 2 rival federal centers – now there was but one. Today, however, we have our doubts about whether a closely integrated global federation – American style – is the world’s likely future.
Instead, we imagine a plural or multipolar global system. But, for that sort of world, perhaps Europe’s federal – or confederal model is a more appropriate formula for integrating regions and continents: unions that are not “perfect” markets or optimal currency areas, unions composed of states not disposed to dissolve themselves in some larger construction or to accept the supremacy of a local hegemon. And if we approach the issue from its other end, i.e. the quality of domestic governance in the two models, we might consider whether our own relatively centralized model is as efficient for managing the problems of modern societies – problems like health care, pensions, education and the like.
In short, perhaps we should try harder not to see the European Union as a primitive, incomplete version of ourselves, i.e. as a continental nation-state in the making. We should see it as a new political formula, one that builds on the achievements of nation-states and links them in a fashion that brings a stable peace to their relationships. Perhaps that will make us more willing to learn from what Europeans have achieved, less worried that they will eventually threaten us, more patient with the “infeasibility” of their policies, and perhaps more concerned with the shortcomings of our own, and perhaps more sensitive to the possible irrelevance of our own visions of the world’s future.