Where to with the European Union?

Is the European Union a grand concept in the making, or merely a muddled mess? I suspect the latter. The British voters have now warned the European Union that Britain will exit, however since then nothing much has happened. One reason that I saw recently is that there will be elections in the next year or so in France and Germany, and the British want to know who they will be negotiating with before they start negotiating. At first sight that seems sensible, except consider how many countries there are in the EU. There is always going to be an election sometime in the near future somewhere. Does that mean that France and Germany are more important? (Yes, they are, but it is not politically correct to say so.) So it appears the first problem with exiting the European Union is there is no actual central part, other than an issuer of regulations conceived essentially by bureaucrats.

Herein lies a great problem for the EU. By permitting individual countries to have their own political systems that are nominally subordinate to a number of regulations from Brussels, and this is a very large number, there is a chaotic situation in terms of economies. The Union may have started as a common market, but it has changed considerably since then, and not in any clear direction. This was made worse when the European countries decided to move towards union via a common currency, apparently hoping that the various countries would adopt common economic policies. However, in representative systems of government, where politicians have to win elections, a common policy is very difficult unless there is some overall federal government. Thus in the US, while the various states can carry out independent actions to a certain degree, Washington still has overall control. That is something the EU has seemingly rejected, even though its structures seem to be heading that way by stealth. And it may be the stealth that has annoyed the British voters.

When the Euro came into being, there were marked structural differences between the various economies, and there was never a plan to harmonize these. Going further, the concept tended to involve a right wing economic view that markets were rational and would self-correct themselves. Just leave it to the market. So they did, and in 2008 there was chaos with a number of casualties. The ordinary Irishman had to pay, under edict from the European Central Bank, to rescue the corrupt Irish bankers. It continues with Greece. There is no plausible mechanism I can see how Greece can get out of the mess the German bankers got them into. It is true that the Greek politicians made the situation much worse, but why should the average Greek have to pay for their politician’s inability to accept policies that might lead to their being voted out?

The question then is, what can the European countries do? Superficially, the simplest “cure” would be to restructure debt and adopt countercyclical measures to fix productivity. The fact seems to be that you can have all the austerity you want, but you cannot have increasing productivity at the same time. It would also be necessary to heavily regulate the banking sector. However, none of this is going to happen. Germany wants to focus on price stability because its economy is, on the whole, doing much better than most. Further, it thinks that austerity on others is the only way its big banks are going to get their money back. That is unlikely to be true, because with economies like Greece, austerity has led to a major contraction, and it is difficult to get more money out of a severely contracting economy.

I suppose there is also the question of whether economic measures can increase productivity. They can certainly destroy it, but increasing it requires more than investment, although investment is certainly critical. The point is investment has to be the right investment. A machine might do the work of ten people, but if it makes something nobody wants, it is actually destructive. So the problem now reduces to finding the right people in the right place at the right time to see what the right things are to do, and then ensuring that there are adequate resources so that these things actually get done. It is here that Germany shines. The problem then is, while it is great that Germany shines, if the rest of Europe does not then Europe as a whole performs indifferently, none of which is helped by a prolonged uncertainty about the position of Britain. This would not matter if the rest of the world was vibrant, but it is not. Now the world has become so interconnected, we cannot have various parts of it performing poorly because it is highly likely that there will be serious difficulties at some time in the future. Economies always seem to go in cycles, and we cannot seem to get ourselves out of the 2008 downturn. We need to put that behind us before the next downturn arrives.

So where to for Europe? In my view, it has to make a clear decision. Either it should revert to a common market, or it should aim to be the United States of Europe. It has to get off the fence; it cannot succeed by being something in between.