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European Union — Is Bigger Really Better?

Was the euro intended to deflect attention from necessary reforms?

December 17, 2003

Was the euro intended to deflect attention from necessary reforms?

Hype has been the European Union's middle name for some time now.

Over the last 20 years, each new initiative has been built up so much that expectation and reality are almost routinely bound to clash.

First, there was the Single European Market project conceived in the early 1980s in the midst of what was then called euro-sclerosis.

This term captured a grave European concern that their economies were increasingly falling behind the challenge presented by Japan and the United States.

The project resulted in the Single European Act of 1987.

It bound member countries to adopt some 300 directives by 1992.

These orders called for the standardization of every economic activity within the EU — all the way down to the ingredients required to produce chocolate Easter bunnies.

In support of the project, the EU commissioned a study by Paolo Cecchini — published in 1988 — which promised unprecedented prosperity across the then 12 member countries of the Union.

However, the reality proved much different as growth remained sluggish.

While many companies and countries complied with the letter of the accord, they were not so certain about its spirit. This was glaringly obvious when Portuguese construction firms won many contracts in post-unification Berlin.

The Portuguese were then admonished in no uncertain terms — because their lower wage assumptions were unacceptably undermining German trade union power.

The Single European Market clearly suffered from Karl Marx syndrome: It would have worked to perfection — if only given a chance.

Then, the EU agreed on a European Monetary Union, culminating in the introduction of the euro in January 1999. Once again, the project was glorified as a panacea to Europe's economic ills.

Yet, it was largely a political compromise dreamed up by former French President François Mitterrand and then-German Chancellor Helmut Kohl — with limited input from the other member countries.

There was little economic justification — or even need — for the plan.

Once again, in order to avoid a comprehensive debate in countries whose public did not get a direct say in adopting the euro, the people were promised huge benefits.

Every political constituency had its own bouquet of reasons as to why it favored the euro.

Integrationists were told the euro was just another step on the way to creating a true union. Anti-Americanists were told Europe would finally be free of U.S. hegemony.

Anti-globalization activists were assured that Europe would not have to change, that it could afford to reject the "horrific" Anglo-American model of capitalism.

But like a nervous bride, Germany got cold feet a few years before the euro was to be implemented. In fear of fiscal profligacy by such serial offenders as Greece and Italy, the inflation-wary German government insisted government spending be controlled.

In 1997, the EU consequently agreed on the Stability and Growth Pact. This agreement stipulated that fiscal deficits could not exceed 3% of GDP in any country of the eurozone.

In case of non-compliance, the country in violation would face serious sanctions. Six years later, economic growth remains weak and asymmetric in Europe.

The common monetary policy has proven to be no more than the lowest common denominator.

And the Stability and Growth Pact is now regularly violated by — of all countries — Germany and France, yet without the threatened punishment.

In the meantime, the EU went on a huge expansion spree and has approved the addition of 10 new members. Once again, this is being heralded as a grand achievement that will create unlimited potential.

Most importantly, this has given new comfort to anti-American sentiments in Europe, because the Union's population will be finally far greater than that of the United States.

This constant overselling of the European project worked all too well in the minds and hearts of many Europeans — until Saturday, December 13.

On that day, EU member countries, including next year's members-to-be, rejected another grand design.

They shunned a proposed constitution drafted by a commission under the leadership of former French President Valerie Giscard d'Estaing.

The desire of small states to maintain equal voting power — and the position of Germany and France to have a weighted voting system — were understandably irreconcilable.

Euro-enthusiasts and Euro-skeptics have overlooked that which unites and divides Europe. Lofty dreams aside, the EU is not the United States, but an ever-growing collection of sovereign countries.

Grandiose ideas to fashion a unified European country were — and are — condemned to fail, because of the existing cultural attachment to the concept of nation states.

The EU leadership has run a gamut of smokescreens of economic integration over the last 20 years in an effort to postpone the inevitable: The "old Europe" must reform — or else.

Euro-realists see great value in the internal elimination of all tariff and non-tariff barriers. But they also agree that a single market will only work if everybody understands and plays by the rules.

They also believe that a single European currency was and is economically premature (although now irreversible).

Euro-realists recognize that EU expansion to 25 countries puts into question an effective decision-making process, especially given the current — already convoluted — practice.

It also further disenfranchises the electorate in EU countries, something Margaret Thatcher referred to in the 1980s as "the democracy deficit."

Most Euro-realists concede that these steps were taken in hopeful avoidance of addressing the real reasons behind Europe's decline.

It is true that EU member countries surrendered large parts of their national sovereignty in approving a single European market, monetary union, the Stability and Growth Pact and in deciding to further expand the EU.

They grudgingly paid this price, because the alternative — true national reform of Europe's calcified economies — would have inflicted great pain on their people.

That made it politically unpalatable to the governing establishment. That is also why the Franco-German axis that would retroactively legitimize premature steps of economic integration on its fellow members was doomed.

Even the most creative study would have to fail in promising the European people great economic rewards — if only a common constitution was adopted.

Hence, the constitutional exercise bluntly revealed that EU member countries are far removed from sacrificing national sovereignty for the mere purpose of political fusion.

In tackling this stalemate, EU leaders may have to factor in an unpalatable truth. They may continue to strive for unity, but the ground that needs to be paved to politically unify the continent is so vast that their goal that may well be 100 years off.