The Tragedy of the European Union and How to Resolve It, George Soros, SEPTEMBER 27, 2012, The New York Review of Books, http://www.nybooks.com/articles/arch...gination=false
I have been a fervent supporter of the European Union as the embodiment of an open society—a voluntary association of equal states that surrendered part of their sovereignty for the common good. The euro crisis is now turning the European Union into something fundamentally different. The member countries are divided into two classes—creditors and debtors—with the creditors in charge, Germany foremost among them. Under current policies debtor countries pay substantial risk premiums for financing their government debt, and this is reflected in the cost of financing in general. This has pushed the debtor countries into depression and put them at a substantial competitive disadvantage that threatens to become permanent.The policies pursued under German leadership will likely hold the euro together for an indefinite period, but not forever. The permanent division of the European Union into creditor and debtor countries with the creditors dictating terms is politically unacceptable for many Europeans. If and when the euro eventually breaks up it will destroy the common market and the European Union. Europe will be worse off than it was when the effort to unite it began, because the breakup will leave a legacy of mutual mistrust and hostility. The later it happens, the worse the ultimate outcome. That is such a dismal prospect that it is time to consider alternatives that would have been inconceivable until recently.
In my judgment the best course of action is to persuade Germany to choose between becoming a more benevolent hegemon, or leading nation, or leaving the euro. In other words, Germany must lead or leave.When it was only an aspiration, the European Union was what psychologists call a “phantastic object,” a desirable goal that captured many people’s imagination, including mine. I regarded it as the embodiment of an open society. There were five large states and a number of small ones and they all subscribed to the principles of democracy, individual freedom, human rights, and the rule of law. No nation or nationality was dominant. Although the Brussels bureaucracy was often accused of a “democratic deficit,” elected parliaments had to give approval of the major steps.
The process of integration was spearheaded by a small group of farsighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.There is a close parallel between the euro crisis and the international banking crisis of 1982. Then the IMF and the international banking authorities saved the international banking system by lending just enough money to the heavily indebted countries to enable them to avoid default but at the cost of pushing them into a lasting depression. Latin America suffered a lost decade.
Today Germany is playing the same role as the IMF did then. The details differ, but the effect is the same. The creditors are in effect shifting the whole burden of adjustment onto the debtor countries and avoiding their own responsibility for the imbalances. Interestingly, the terms “center,” or “core,” and “periphery” have crept into usage almost unnoticed, although it is obviously inappropriate to describe Italy and Spain as periphery countries. In effect, however, the introduction of the euro relegated some member states to the status of less developed countries without either the European authorities or the member countries realizing it. In retrospect, that is the root cause of the euro crisis.Imperial power can bring great benefits but it must be earned by looking after those who live under its aegis. The United States emerged as the leader of the free world after the end of World War II. The Bretton Woods system made it the first among equals, but the United States was a benevolent hegemon that earned the lasting gratitude of Europe by engaging in the Marshall Plan. That is the historic opportunity that Germany is missing by holding the heavily indebted countries to their Schuld.
It is worth recalling that the reparations payments demanded of Germany after World War I were among the factors giving rise to National Socialism. And Germany had its own Schuld reduced on three separate occasions: the Dawes Plan in 1924, the Young Plan in 1929—too late to prevent the rise of Hitler—and the London Debt Agreement in 1953.
Today Germany does not have imperial ambitions. Paradoxically, the desire to avoid dominating Europe is part of the reason why Germany has failed to rise to the occasion and behave as a benevolent hegemon. The steps taken by the ECB on September 6 constitute the minimum that is necessary to save the euro but they will also take us a step closer to a two-tier Europe. The debtor countries will have to submit to European supervision but the creditor countries will not; and the divergence in economic performance will be reinforced. The prospect of a prolonged depression and a permanent division into debtor and creditor countries is so dismal that it cannot be tolerated. What are the alternatives?1. Establishing a more or less level playing field between debtor and creditor countries, which would mean that they would be able to refinance their government debt on more or less equal terms.
2. Aiming at nominal growth of up to 5 percent so that Europe can grow its way out of its excessive debt burden. This will necessitate a higher level of inflation than the Bundesbank is likely to countenance. It may also require a treaty change and a change in the German constitution.By contrast, if Germany were to exit and leave the common currency in the hands of the debtor countries, the euro would fall and the accumulated debt would depreciate in line with the currency. Practically all the currently intractable problems would dissolve. The debtor countries would regain competitiveness; their debt would diminish in real terms and, with the ECB in their control, the threat of default would evaporate. Without Germany, the euro area would have no difficulty in carrying out the U-turn for which it would otherwise need Chancellor Merkel’s consent.What can bring Germany to decide whether to stay in the euro without destroying the European Union or to allow the debtor countries to solve their problems on their own by leaving the euro?
External pressure could do it. With François Hollande as the new president, France is the obvious candidate to advocate an alternative policy for Europe. By forming a common front with Italy and Spain, France could present an economically credible and politically appealing program that would save the common market and recapture the European Union as the idealistic vision that fired people’s imagination. The common front could then present Germany with the choice: lead or leave. The objective would not be to exclude Germany, but to radically change its policy stance.
Unfortunately, France is not in a strong position to form a united front with Italy and Spain in the face of determined opposition from Germany. Chancellor Merkel is not only a strong leader but also a skilled politician who knows how to keep adversaries divided. France is particularly vulnerable because it has done less than Italy or Spain to accomplish fiscal consolidation and structural reforms. The relatively low risk premium that French government bonds currently enjoy is due almost entirely to France’s close association with Germany. Asian central banks have been buying French bonds, especially since German Bunds have started selling at negative yields. Should France ally itself too closely with Italy and Spain, it would be judged by the same yardstick and the risk premium on its bonds may rise to similar levels.The campaign to change German attitudes will therefore have to take a very different form from the intergovernmental negotiations that are currently deciding policy. European civil society, the business community, and the general public need to mobilize and become engaged. At present, the public in many eurozone countries is distressed, confused, and angry. This finds expression in xenophobia, anti-European attitudes, and extremist political movements. The latent pro-European sentiments, which currently have no outlet, need to be aroused in order to save the European Union. Such a movement would encounter a sympathetic response in Germany, where the large majority is still pro-European but under the spell of false fiscal and monetary doctrines.
Originally Posted by Firn
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