Repeated efforts to unite Europe under a common vision mark the strained history of the continent. What neither Napoleon’s cannons nor Hitler’s tanks could accomplish by force was supposed to be realized by common economic interest through the 1992 Maastricht Treaty that created the European Union and a common currency, the euro. Flags and borders were ultimately to become relics of the past, much like currencies such as the Greek drachma and the Italian lira.
Will the European sovereign debt crisis become Europe’s Waterloo? I think not. Each step of the way, European policymakers have taken incremental steps—including individual bailouts of Greece, Ireland and Portugal, bond purchases by the European Central Bank, and the creation of the €440 billion European Financial Stability Facility—to stave off looming catastrophe. Though markets have backed away from their recent panic mode, Europe’s future as a political entity still hangs in the balance.
Once again, it’s France and Germany, personified by French President Nicolas Sarkozy and German Chancellor Angela Merkel, leading the unruly continent toward greater unity. This week’s much anticipated meeting between our hero and heroine brought Europe one step closer to a Eurozone government, even as they avoided specific moves such as a eurobond issue. Plans for better coordination of economic policy and mandatory balanced budgets amongst the member states are a positive step although, as we’ve already seen, forced austerity during a recession can make matters worse for the countries of the periphery.
European policymakers should ultimately come around to the only long-term economic and political solution and issue the eurobonds. The issuance of joint government bonds would make the entire currency bloc responsible for its member nations’ debts. The economics work. The total debt of the 17 countries of the Eurozone is roughly 58% of Eurozone GDP, a level that many countries of the developed world, including the United States, can envy. To date, however, the concept remains politically unpalatable. Such a transfer of wealth would leave Chancellor Merkel facing a mutiny on her hands that would make Tea Party politics in the U.S. seem benign by comparison.
The cost of a Eurozone breakup to Germany—not just in bank runs but BMWs priced in super-strong deutschmarks—would prove too costly. A fiscal union is coming to Europe. The sovereign debt crisis will do more to finally bring Europe closer together than the armies of Napoleon and Hitler could ever have hoped.