Today’s Wall Street Journal carries an article by Princeton economist Alan S. Blinder titled “Enough With European Austerity, Bring on the Stimulus.” The Financial Times carries similar columns every day of the week and two or three times in the weekend edition. Come to think of it, I have written a few such articles myself.
Back to the Future
In reality, we are all missing the point. To get the proper perspective, forget about Europe for a moment and think back to the founding of the United States in the 18th and early 19th century. The nation was created by the Constitution ratified in 1788, but that document papered over the divisive issue of slavery with the “three fifths clause,” which apportioned Congressional representation based on 60% of a state’s slave population and 100% of its free population.
But as the U.S. expanded westward the slavery issue—the fundamental question of whether the U.S. would be a “free labor” nation or one that actively tolerated slavery—kept flaring up, threatening national unity. It was deftly finessed by politicians in the Missouri Compromise of 1820 (which admitted Maine as a free state and Missouri as a slave state) and the complex Compromise of 1850, but the “popular sovereignty” solution in the Kansas Nebraska Act of 1854 led to open warfare in those states. The Civil War finally settled the issue, making the U.S. “one nation, indivisible” that was free of slavery, but still extremely racist.
Nation Building in Europe
Europe is going through a similarly tortuous and torturous process of nation building that may continue for decades. Although its economic benefits have been touted over the years, the European Union was created primarily for two political reasons:
- Avoid World War III by getting Germany and France to embrace;
- A united Europe would be a Great Power, coequal with the U.S., China and (once upon a time) the Soviet Union.
The goal is unity and national greatness—but on whose terms? The terms of Germany (orderly, efficient, disciplined, rational, ever on guard against inflation) or France and Italy (far less so on all counts). Germany believed the strict rules requiring balanced budgets would force France and Italy to pursue economic policies consistent with German values; there would be gradual economic, political and social convergence.
But Germany’s expectations of national convergence turned out to be incorrect. Erasing profound national differences that developed over many centuries cannot be erased in a few years. And it doesn’t help that the E.U.’s structural design—one currency, one central bank, multiple fiscal policies, distinct labor markets—is simply dysfunctional, because it prevents weak national economies from having an accommodative monetary policy and weak currency.
The great divide between Europe’s North and South was revealed to me when we were vacationing in Florence a few years ago and hired a driver to take us out to Villa Gamberaia, a beautiful garden in the suburbs that overlooks the city. The driver was bitterly criticizing the corrupt politicians in the Italian legislature, who get big salaries and lots of perks for not much work. I asked the driver, “Is there a split between Italy’s hardworking businesslike North, centered on Milan, and the more easy going mores in the South, centered around Naples?” He replied that there really was not much difference between North and South—except, of course, that the South was substantially controlled by the mafia.
Oops. That’s what Germany is worried about. It does not want to let its balance sheet be used to subsidize organized crime in Italy and socialism in France.
The Germans are not dumb. They understand perfectly well the Keynesian arguments made by Alan Blinder, Paul Krugman, the FT’s Martin Wolf, etc. But they are playing for higher stakes than next year’s GDP print. When we see Germany demand that France and Italy balance their budgets and carry out “structural reforms” such as cutting taxes, allowing firms to fire workers without going to court, and getting rid of France’s 35-hour work week, we are not just witnessing an argument over economic policy. We are witnessing a political struggle about the character of Europe, similar to the standoff between America’s North and the South prior to the Civil War.
The problem for Europe is that while this political stand-off goes on the European economy stagnates, unemployment hangs around 10% and much higher for the young, and extremist political parties gather strength. Average voters won’t put up with decades of misrule by a well-compensated, ineffectual elite. I have no idea how this ends, but it won’t be pretty. Hopefully Europe can build a united nation more amicably than the United States managed to do in the nineteenth century.
Copyright Thomas Doerflinger 2014. All Rights Reserved.
