More Europe

“We need more Europe; we need more cooperation,” said German Chancellor Angela Merkel. She is now calling for a joint budget policy and expanded political union for Europe.

-Deutsche Welle, June 2012

At the height of the European Sovereign Debt Crisis, German leader Angela Merkel was openly calling for ‘more Europe, not less’. She was calling for a fiscal union too. With Emmanuel Macron elected to the Presidency of France on that platform, Merkel has perhaps her only chance to make good on her 2012 vision. First she needs to get re-elected though. But if she gets that far — and her party’s election win last night in Schleswig-Holstein suggests she will —  she has to meet Macron with a reformer’s fervour or lose Europe to nationalism.

Let me be honest. I don’t think Macron can reform Europe, not by a long shot. But he has to try. And if he does, he won’t get anywhere without Germany’s support. That’s why Merkel is so important. 

Let’s get the German politics out of the way here. Merkel has backed away for her cries for ‘more Europe’ because the electorate has moved away from that stance, especially in the aftermath of the refugee crisis. But the AfD party on her right looks like a spent force to me, after a leadership battle in which the more pragmatic vision of its leader, Frauke Petry, failed at the national congress. This party will now be seen as an extremist party and will pose no threat to Merkel in September elections. That will give her a free hand to move to the center.

So if she is re-elected Chancellor in September, she will be able to meet Macron and his vision for more Europe. And earlier today Bloomberg’s Ferdinando Giugliano reminded us exactly what his vision entails:

He’s talking about a fully Federal Europe that has a central Treasury with permanent fiscal transfers and just one finance minister, funded by member state VAT taxes and unemployment insurance. That is a major step. It would require Treaty changes. And those Treaty changes would require national votes in every one of the EU-27 nations and would need to be supported by EU state leaders like Angela Merkel. A veritable United States of Europe: How likely is that?

I’ll let you answer that for yourself. I’m going to answer by asking you a different question: why is Macron proposing this at all? 

Look at what people who understand the economics of European institutions had to say decades ago. Late British economist Wynne Godley said when the euro was designed in Maastricht, Netherlands in 1992 that it “would indeed bring to an end the sovereignty of its component nations and their power to take independent action on major issues.” He said that “if a country gives up or loses this power, it acquires the status of a local authority or colony.” And he also said, “The incredible lacuna in the Maastricht programme is that, while it contains a blueprint for the establishment and modus operandi of an independent central bank, there is no blueprint whatever of the analogue, in Community terms, of a central government.” His prediction? Countries in the eurozone in crisis “suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.”

He predicted all this twenty-five years ago. And Greece shows you he was right.

That’s where the big problem lies: with Emu. It’s ironic that the first state to leave the EU is Great Britain, when it suffers none of these problems. But this goes to other democratic deficits of the EU – and is totally different kettle of fish.

The bottom line: European monetary union has turned sovereign nations into bond market supplicants — dependent on fiscal rectitude, the demand of bond traders for their debt, and the willingness of an unelected ECB to intervene when things go pear-shaped. This is no way to run a continent.

As difficult as the concept of ‘more Europe’ is to stomach for some in the EU, the reality is that it is the only way the Euro nations survive — without a major economic crisis — is by acceding to ‘more Europe.’ Will they do after Macron’s election? The next year or two will tell us.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.