The Solution to Europe’s Debt Crisis may be as ‘simple’ as the Eurozone Nations surrendering their Sovereignty

Posted by PITHOCRATES - June 24th, 2012

Week in Review

The solution to the Eurozone debt crisis is easy.  All the European nations have to do is surrender their sovereignty (see The eurozone’s long reform wishlist by Laurence Knight posted 6/24/2012 on BBC News Business).

A US-style federal budget may be needed to cover the cost of recessions, so that individual governments don’t risk going bust when their national economies get into trouble. For example, the cost of a minimum level of social security – especially unemployment benefits – could be permanently shared across the eurozone, paid for by a common income tax.

Welcome to the new world order.  At least the new country of Europe.  Made up from the former European nations.  And, unsurprisingly, the answer to all their problems is a new tax.  Not just any tax.  But a European income tax paid to a distant central power.  The kind of thing that embroiled Europe in wars to prevent going as far back as the Roman Empire.  And beyond.

The European Central Bank may need to have its mandate changed so that it has an explicit dual target to support employment as well as price stability, just like the US Federal Reserve does, as proposed by the new French President Francois Hollande.

Because it has worked so well in the United States.  The Fed was in charge during the Great Depression.  The Fed was in charge during the stagflation of the Seventies.  The Fed was in charge during the irrational exuberance of the Nineties.  And the Fed was in charge during the great housing bubble that gave us the subprime mortgage crisis.  Few people in the US think the Fed should be supporting anything these days.  For they feel they’ve done enough damage.

All Europeans (and especially southerners) are having to implement structural reforms that will increase their long-term growth and strengthen government finances, including removing restrictions on market competition, raising the retirement age, laying off (over many years) a lot of state employees, and making it much easier to hire and fire employees.

Really?  Something the individual European nations couldn’t do (cut back generous state benefits) a European country can?  Students in France took to the streets when they added a year or so to the retirement age.  Students took to the streets in Britain when they tried to make students pay for a part of their college education.  And Greece’s answer to austerity?  Riots.  It is easy to say what they must do.  Getting them to do it is another thing.  And they’ve clearly shown they don’t like doing it.  And so far have chosen not to.

In the same way that Washington has helped out struggling US states, the southern European governments may need to be given money (given, not lent) by the rest of the eurozone via direct fiscal transfers, so that they can afford to prop up their economies until they have regained competitiveness. These transfers could end up taking the form of bailout loans that are never repaid.

The US government can’t afford to bailout any states.  The state of California is in trouble.  As are some of our big cities.  Such as Chicago.  And New York City.  They have the same problem Greece has.  They have far more spending obligations than they can afford to pay.  As did the state of Wisconsin.  Whose governor implemented the kind of structural reforms suggested for the new European country.  And the opposition party and the federal government attacked them for it.  Organized a recall drive to kick out the governor.  And undo those structural reforms.  But the recall failed.  The governor won the recall election by a large margin.  Showing the people are no longer going to pay for other people’s irresponsible spending.  As the European people probably won’t want to either.

To make a full banking, fiscal and monetary union work, the eurozone governments would need to hand power to a central authority (the European Commission) that can pay for and supervise all of the above, while national governments accept that in future they have to keep their own spending strictly within their limited means.

 As most of the above reforms involve Germany sharing its wealth with the rest of Europe (and all European nations handing power to Brussels), Berlin is insisting on the principle of no taxation without representation – in other words a move towards full federalism, with spending and regulation controlled by a directly elected presidency of the European Commission.

Few European governments like hearing Germany tell them to implement structural reforms.  They’re not going to like it any better coming from Brussels.  Federalism wasn’t easy in the US.  We had to fight a civil war.  Go through reconstruction.  To this day we’re still fighting regional conflicts.  The Midwest is strongly union while the southern states are not.  And the federal government recently intervened on the side of the unions when Boeing tried to build a new aircraft manufacturing plant in the South.  In fact, those in the federal government refer to those states as flyover country.  Which is all they want to see of that country.  Flying overhead as they go between the east and west coasts.  Where the big government people live.

The 13 original American states had only about 200 years of history before they joined the federal union.  The European people have over 2,000 years of history.  It is unlikely that they will willingly choose to become flyover country.  No, there isn’t any easy solution to their problem.  If there was they would have already done it.  A currency union without a political union may just prove to have been a bad idea.  A political union isn’t likely.  Unless the people of Europe are more willing to give up their 2,000 years or so of history than the Americans were willing to give up their 200 years or so of history.  And if they’re not they should really think long and hard about creating something even bigger than the Eurozone.  That may be even more difficult to fix.  Should it follow US history too closely.  Where that first hundred years proved to be a bitch.

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