Confusion is nothing compared with what could happen as Europe moves on to the next stage in its grand experiment. The euro was born out of politics, in part a condition for France to approve the reunification of Germany. By erasing national borders, it is a step toward a political union that was initially conceived in the 1950s to reduce the risks of another European war. Many Europeans forget that former German chancellor Helmut Kohl had intended the euro to be the first move toward a United States of Europe. The Treaty of Maastricht, which laid out the final path to the euro in 1992, calls for political integration. No one broadcasts the controversial goal too loudly these days. Quietly, though, eurocrats hope the summit just adjourned in Laeken, Belgium, will lead to some kind of constitution for Europe.
If people accept the euro easily, they may also tolerate further power-grabbing by Brussels. But if Europeans feel cheated by sneak price hikes, or confused by the new currency, they will be hard pressed to back anything that smacks of an even greater loss of sovereignty. Their anger could be exercised directly if a constitution or new supertreaty is achieved and put to the people for a vote. So far, the euro has been at best a weak vote getter at the polls. Germany, where two thirds of the people are still opposed, never had a referendum on abandoning its beloved mark, and the French barely approved it by a 51 percent majority. Denmark has said no, twice.
Europhiles and euroskeptics alike agree that a single currency is not workable for long without some kind of a federal state. That’s because the European Central Bank controls interest rates, but national governments still control spending, and the two can have opposite effects on economic growth. The eurozone nations tried to preclude such clashes by requiring all members to abide by a cap on deficit spending, but that only limits national options. It does not widen the powers of the European Union. In the United States, by contrast, if Texas slumps when California booms, help is automatically transferred via Washington in the form of taxes collected in one state and unemployment bene- fits paid out in the other. Europe doesn’t have such a shock absorber.
There is already friction between countries over the powers of the European Central Bank. The ECB rate of 3.25 percent might still be too high to boost growth in Germany, now dipping into recession. Ireland, where housing prices doubled in four years, grew by 9 percent last year and needs to put on the brakes. Ireland is just a tiny part of the euro economy. But the stakes grow when two large countries seriously diverge.
The question in such a situation is, how much power do the federalists have to assume to save the euro? The first test will be whether the people accept some kind of federal tax to redistribute welfare services throughout the eurozone, says Eric Chaney, economist for Morgan Stanley. At the moment, the EU budget is only 1.4 percent of the value of the EU economy, compared with 18 percent in the United States and one third to more than one half in individual European countries. A study back in 1977 found that the European Economic Community, as the EU was then called, would have had to spend 8.75 percent of its GDP to make up for the loss of interest-rate flexibility.
But there is no indication that EU citizens are ready to entrust their wallets to Brussels. Just listen to the leader of an alternative summit, also held in Laeken. “We are good Europeans in that we are for cooperation between independent states [and against] an EU superstate with a federal structure,” says Hans Lindquist, a former EU parliamentarian from Sweden who now coordinates TEAM, an alliance of 45 eurocritical associations. Such decisions should not be handed over to people who are “skilled civil servants, perhaps too skilled,” he says.
If a currency needs a state, and Europeans balk at creating that state, then the euro could be in for trouble. Of course, it is not politically correct to even raise such questions at a time when the EU is aggressively promoting the euro. Only an American would ask that, scoffs one EU official, who notes that the Maastricht Treaty includes no mechanism for withdrawing. A German bureaucrat derided a NEWSWEEK reporter as a right-wing radical “p—ing on the politicians’ legs” for even asking the “idiotic” question of whether it is possible for Germany to pull out. But the answer, the bureaucrat later admitted, is, maybe. And Europeans are asking the question, too. “This unification is forced and fake,” says Robert de Mattei, head of the Italian anti-euro group Lepanto. “It is not impossible that the euro will fail.”
Here’s how it might unravel in Germany. In 1993 and in 1998, three German economists and one law professor went to court to stop Germany from adopting the euro, mostly on the ground that it violates laws protecting price stability and was imposed undemocratically. They lost both times, but in 1998 the judges wrote that Germany would join on the assumption that the euro would keep prices stable. In theory, then, German law could allow for the country to pull out in the event of severe inflation. Even Wilhelm Nolling, one of the plaintiffs, doubts that would happen. “Germany is too cowardly. We would never trigger disintegration and get blamed,” he says.
The most likely scenario for disintegration originates in France. It has such a long history of centralized government that euro critic Jean-Paul Bled cites Joan of Arc to help argue against a federal Europe and for the demise of the euro. France is also politically volatile. Chaney points to 1968, when Charles de Gaulle appeased rioting workers by hiking the minimum wage by 20 percent and pensions by 25 percent. A year later, after winning elections, he devalued the franc by 20 percent to help pay for the wage hikes. Without a national currency, no French politician can do that now. Bled believes euroskeptics represent at least one third of the French electorate. “The gap between our government and the people is growing,” he warns. “It’s a problem our politicians will not be able to elude at the end.”
Sounds farfetched? Pushing the doomsday scenario to the limit is American economist Martin Feldstein, who has argued that attempts to manage monetary union could lead to increased conflicts within Europe, and that the potential for such conflicts to erupt in war is “too real to ignore.” Extreme, yes, but a useful reminder that the euro is a continuation of European diplomacy by economic means. A powerful external shock, say a sharp spike in oil prices, could be the trigger that derails the whole euro project. Otherwise, the overwhelming likelihood is that a compromise on how to coordinate taxes and spending for the sake of a stable euro will be found, at least for now. “Europe has an irritating habit of ghastly compromise and muddling through,” says British political scientist John Laughland, a euroskeptic. That’s been true of late. But it also has a long history of crises and war.
