Wednesday, March 31, 2010

EU Facing Tough Choices

Even though the EU has been evolving from “crisis” to “crisis” since its inception, the crisis is real this time, writes Iain Martin in the Wall Street Journal .

“The architects of the euro were warned that, on its own, a currency union wouldn't magically encourage southern European states to start producing, saving and managing their nation's affairs in the manner of the Germans. Those offering warnings have been proved correct and the flaws in the euro's design are now apparent to even those who insisted at the time that there were none.

Yes, after much wrangling a deal to support stricken Greece is in place, but only with the Germans enforcing strict conditions. This is a sticking plaster solution. What must come, logically, is something close to a form of economic government by those states that want to stay as the inner core of the euro. It might be called by another name, but that is what it will be.

And that leads to a full-blown political crisis for the EU itself. The choice for various countries then is between trying to be part of an inner core organized around the euro with coordinated fiscal policy, or standing outside it in a trading zone built on cooperation rather than coercion.

The Eurosceptics, in countries such as Britain, are just starting to realize this. The euro's problems will force its strongest members into much closer integration than even they currently envisage. Other than breaking up the euro they can do nothing else—standing still isn't an option. In this way that old discussion about there being two distinct Europe's inside the EU is coming back rapidly into fashion. Sounds like it has the makings of a proper crisis.”

My comment: It is now widely recognized that the Eurozone is not an optimal currency area, a conclusion that a few economists reached many years ago. But it is not either an "optimal state area", first, because of its heterogeneity, and second ,because the global organizational trend is favoring smaller rather than larger size of hierarchies, a change which is also valid for state hierarchies.

Let us add a third reason: having been used to benefit from a peace dividend under US protection since WWII, European states are not ready to sacrifice welfare state spending to increase their military spending.

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