By William Pfaff
The present crisis of the European Union was inherent in the creation of the institution itself. It is a political-economic hybrid and was intended to be an alliance of mutually supportive qualities.
The qualities have instead proved to be a contradiction, mostly dormant since the Brussels Treaty of 1948. That treaty established a “Western European Union” of “economic, social and cultural collaboration,” and also “collective defense.”
In 1951, the European Coal and Steel Community was formed, placing under common control European heavy industry, including that of Federal Germany, making war impossible among the signers. These agreements were subsequently combined and enlarged in the 1957 Treaty of Rome, forming what today has become the European Union.
The fateful flaw was that these founding treaties combined security and political cooperation with economic union, with this economic union conceived as the means by which the political goals would be reached. This brilliantly succeeded in the so-called Coal and Steel Community. Europe’s military security was in 1949 handed off to the new NATO, which brought in the two North American allies of the Europeans, the United States and Canada, to create a common defense against the perceived threat of Soviet aggression.
The EU concentrated on the construction of institutions and agreements promoting union of Europe’s industrial standards and cooperation, establishing a common internal market, abolishing trade barriers and encouraging pan-European business. The free market in goods was logically complemented by the Schengen Accord in 1995, abolishing border controls and the need for passports for individual travel among most of the EU nations, plus Norway, Iceland and, more recently, Switzerland.
In 1979, there was a monetary agreement among the EU members, by which the EU governments increasingly tracked one another’s currency exchange rates, culminating in a European Central Bank and the adoption of a single currency, the euro, which went into circulation in 2002 among its 11 founding members (others subsequently joining).
This created today’s situation, in which monetary union, and conceivably the European Union itself, may be threatened—just as monetary union’s critics had warned would happen.
The question has always been how the European Central Bank can, with its single monetary policy, manage the disparate needs of the economies of the euro-committed states. This proved possible, if delicate and demanding, before Wall Street precipitated the world’s economies into a credit crisis.
At first the attention of governments, and crucially of speculators, was on banks and other financial institutions endangered by the collapse of the securities they held. Rescued at enormous cost by governments, the major credit institutions survived but were badly wounded.
Unless the governments of the Western countries—and specifically the Congress of the United States—prove able to impose the reregulation and new regulation of national and international finance, this crisis will recur in the future, from the same causes.
To succeed, elected officials must reject the renewed pressures of the rapacious—and sometimes criminal—interests that developed and sold worthless securities to their irresponsible or ignorant counterparts and their customers. As to the criminal component in the crisis, I refer you to the explosive testimony presented by professor James K. Galbraith of the University of Texas at Austin to the Subcommittee on Crime of the U.S. Senate Judiciary Committee on May 4 (the day I am writing).
Predatory speculation has now turned against economically vulnerable countries in the euro zone, Greece first of all, producing the political agonies of recent weeks in getting German agreement (above all) to support Greece in its debt crisis.
Mischievously called a “bailout” by German authorities and the international press, this was actually a question of guarantees by other euro-zone Europeans of the loans needed by Athens to pay interest on its current loans.
Seeing German hostility and obstructions to such help for Greece, the speculators and rating agencies piled on to drive up the rates at which these loans to Greece would be available—and most profitable to the speculators. They are now trying to do the same thing to Spain. (The French presidency has just described the conduct of the rating agencies as “criminal.”)
Greece’s debt crisis is for the moment eased, thanks to the adjustment in Germany’s position that allowed the European Central Bank to announce Monday that it would accept Greek bonds as collateral for future loans.
However, the fundamental problem is not solved. National indebtedness in all three vulnerable countries (Spain, Portugal and Greece) had in the pre-euro era the possibility of remedy by devaluation or by the opportune workings of inflation.
That would have been a sovereign political decision. This sovereign decision has now been renounced. This will influence the British general election this week, as the Conservatives are appealing to the anti-EU electorate.
In earlier years, European optimists said “Europe” would in the future be the new great power. It has not happened. The EU, and the expanded EU in particular, is collectively an economic power, but its limitations even in that respect have been painfully demonstrated. It is incapable of any but the most anodyne collective decisions concerning world affairs.
On trade issues, “Europe” exists (and has a phone number). Until yesterday, “Europe” was a world financial power. This may no longer be true. The solidity of the euro and of the European Central Bank is in doubt.
It’s not that Americans continue to rule. It’s the speculators, and their enablers, the rating agencies, who have taken charge. Will anything be done about it?
Visit William Pfaff’s website at www.williampfaff.com.
© 2010 Tribune Media Services Inc.