Illustration by Mark Owens
Illustration by Mark Owens

The arc of Europe’s postwar history is turning toward tragedy. It isn’t just that much of the continent has fallen into a new Great Depression, or that in some countries things will get worse before they get better. It isn’t even that the whole mess was avoidable. It’s that the crisis is dividing Europe along the very lines the European project was intended to erase.

Decades of cliches about European solidarity and the European idea are being held up to ridicule. The argument that Britons, Germans, Greeks, Italians and Spaniards are instinctive cultural partners whose commonalities transcend their obvious differences and historical enmities -- that “Europe” is a real community, not just a heavily worked-over Brussels blueprint -- turns out to be, let’s say, disputable.

Ancient stereotypes frame conversation about the crisis. Germans are bossy and severe. Italians are idle. Greeks are corrupt. Brits are arrogant. The French are vain. So much for 60 years of European unification.

Germany in particular is coming in for bashing, not just in Greece, where cartoonists have brushed up on their swastikas, but in Italy, Spain and other countries suffering the stress of a German-directed drive to restore Europe’s public finances.

Walking Alone

Until recently, Germany could claim to be expressing the consensus of rich northern Europe, but no longer. In a union that was intended, not least by Germany’s own leaders, to bind and subdue Germany within a larger whole, it instead stands increasingly isolated.

Why did it all go wrong? Three main reasons: French grandiosity, German shame and a universal law of bureaucratic self-aggrandizement. These formed a European Union that was poorly adapted to the stresses the project was sure to encounter. The EU was unlucky that the crisis came when it did - - before national loyalties had diminished and an emerging EU identity had begun to take their place. Yet the EU’s designers had some sense of the risk they were inevitably running. They gambled and lost.

The overriding goal for a Europe in ruins after 1945 was to create a secure zone of peace and prosperity. Reconciliation between France and Germany, formerly bitter enemies and sure to be the dominant economic entities in a new Europe, was vital. As a matter of the highest priority, the two countries formed a close alliance, and began building a new united Europe around it. They started modestly in 1951 with the European Coal and Steel Community, but entertained bigger ambitions at the outset. As early as 1957, the Treaty of Rome enshrined the notion of “ever closer union.” This became the organizing principle for Europe’s subsequent evolution.

The path not taken was that of an enhanced free-trade area, a zone of economic cooperation among sovereign states, a kind of NAFTA-plus. According to France’s thinking, if Europe was to compete and engage on equal terms with the U.S., it would need to aim higher than that. Ultimately, a United States of Europe was the goal.

From an early stage, Europe hoped to integrate politically as well as through trade and commerce. As the European Economic Community came into being, it took in new members and began to develop a thin yet feverishly proliferating European layer of government, complete with parliament and executive. These two drives were in tension. Members of an ever-widening union had less in common than countries in the advanced-economy core, making political and economic integration ever harder.

A Bold Moment

Germany mainly wanted a broader union -- to surround itself with friendly states, even if they were at very different stages of economic development than those at the European core. France sought especially a deeper political union, one that would subdue German economic power and give Paris more reach. Compromising, the two former foes chose to broaden and deepen at once.

The critical juncture was reached in talks for the Maastricht Treaty of 1992. This provided for European Monetary Union, the boldest step yet.

As you would expect, France was keen on the new single currency: This was deepening with a vengeance. Under then-existing arrangements, French monetary policy was in practice constrained by the choices of Germany’s mighty central bank. France had no vote on the Bundesbank’s board, but its interests would be recognized by the European Central Bank. Back then, it saw monetary union as adding to, not subtracting from, its monetary sovereignty.

More gloriously -- and what is France for, if not la gloire? -- the single currency advanced the goal of a Europe fit to contend with the U.S. in global affairs. The dollar needed a rival. The euro would be it. A truly single European market, which the EU had resolved to build, needed to eliminate exchange-rate risk, and that required a single currency. What better way to incubate a European sense of identity than to create such a currency?

As before, Germany viewed deepening more skeptically. Polls told the government that, had Germany’s constitution permitted a referendum on dropping its esteemed mark, the country would have rejected the idea. But Chancellor Helmut Kohl gave greater weight to other considerations. Germany’s sudden enlargement to the east was stirring concern. Kohl wanted to offer reassurance. This was not Deutschland ueber Alles, you understand. There’s no going back to that shameful past. See, we’ll surrender the mark to prove it. Germany acquiesced in the annihilation of its currency out of meekness.

Yes. That’s ironic.

Central Banking Politics

There was another factor, almost as laughable in hindsight. A view had gained ground that central banking was above politics. The goal of monetary policy was simple -- price stability -- and the means purely technocratic. The old Keynesian idea that governments could trade a bit of inflation for a spurt of faster growth stood discredited. If choices like that ever arose, central banking would be political; but such choices don’t arise, so monetary policy should be held above the fray.

That’s why leaders weren’t too worried that Europe’s democratic underpinnings, including its arrangements for fiscal policy, were so much weaker than those of a typical currency-issuing nation-state. Actually, they thought, this was a good thing. The EU’s governance deficit would make the ECB all the more independent. Left alone, it could do its job better and without controversy.

Nice theory.

This crisis has proved that central banking is a branch of politics. Under some extreme circumstances, such as the ones we’re in, monetary policy is really just fiscal policy by other means -- as when a central bank engages in “quantitative easing” and takes government debt onto its books. Strictly speaking, again to underline its independence, the ECB was forbidden to do that, but out of necessity it has lately found ways around the prohibition. Many economists are now calling for more QE.

In addition, with economies across the euro area diverging, the supposed simplicity of the stable-prices goal has evaporated. Price stability in Germany means depression in Greece. But the euro area can have only one monetary policy. Setting it involves choices that are as political as they come - - but no clear line of democratic accountability connects the ECB and the EU’s citizens or governments.

Central-bank independence aside, economists drew attention to the fragility of the euro system’s design from the start. Most presciently, Harvard’s Martin Feldstein stressed that as economic performance differed from one country to the next, a single currency would pit winners against losers, and Europe lacked both the political machinery and the democratic legitimacy to mediate these disputes. How right he was.

Passing the Burden

The standoff between Germany and its allies with fiscal austerity on one side and the distressed peripheral economies of Greece, Ireland, Portugal and Spain on the other comes down to a fight about who bears what burden. German taxpayers are unwilling to subsidize what they see as their reckless and feckless EU partners. If this reluctance brings the ceiling down, it may do Germany more harm than good. You can understand it nonetheless. Since Europe’s national solidarities look more entrenched than ever, you can also understand resentment in Greece and elsewhere at being dictated to by Berlin.

One way of describing Europe’s dysfunction is to say that economic integration, which sped up with the euro’s arrival, got too far out in front of political integration. Although that’s true, you would be wrong to conclude that political integration could have moved much faster. Successive treaties have run into mounting popular resistance to the transfer of decision-making power to the EU. Across Europe, politics is still resolutely national. To many Spaniards, Madrid seems remote, let alone Brussels -- and a similar mindset applies to most other EU members.

For that reason, adopting the single currency was always going to be a risk, but it didn’t need to be as risky as it proved. National governments understood what the economic demands of the euro would be, then spent more than a decade doing nothing about them. Successive Greek governments not only overborrowed but also cooked the books to hide the fact. Greece was an outlier only in that latter respect. Everywhere, complacency about the safety of sovereign debt was total. For years governments borrowed, and creditors lent, as though Greek (or Italian or Spanish) debt was as safe as Germany’s.

That bad behavior was compounded by the failure to align financial regulation with monetary union. The single currency fostered deep financial integration across the EU -- one of the things that make exiting the single currency so difficult. But progress toward a consistent EU-wide system of financial regulation has been slow.

Continental Drift

Labor markets also remain more national than continental, leaving workers and businesses at the mercy of the EU’s imperfectly synchronized business cycles. Migration is permitted in theory, but can be difficult in practice because pension arrangements and labor certifications aren’t easily portable. Anyway, how many Frenchmen want to live in Britain? Or vice versa?

Powerful unions and broken wage-setting systems let labor costs get out of hand, and created a widening competitiveness gap between Germany and southern Europe, the main underlying cause of the peripheral countries’ current plight. Until the crisis intervened, labor-market craziness as notorious as Spain’s -- where a dual system of permanent and disposable workers has driven the unemployment rate to 25 percent -- was left unattended.

The EU’s executive arm, the European Commission, is much to blame for this neglect. For years it focused on enlarging and complicating its areas of competence (I’m using the term in its technical sense) but failed to prioritize the issues that would make or break the currency union. Its pathological zeal to standardize product-market regulation fueled resistance to more rule from Brussels -- resistance it then deflected by spraying regional development funds hither and yon. Its intrusiveness contrived to be both threatening and absurd. The commission thrived on tasks that neither made the euro system safer nor prepared the EU for the economic stresses of the crash.

The ultimate result is the fateful choice that confronts Europe in the coming days and weeks. Already this month, a breakup of the euro system has gone from being unthinkable to becoming a planned-for contingency. The immediate question is whether Greece will exit. Europe’s leaders would hope to stop the rot there. But if a “Grexit” happens, attention will turn instantly to which country goes next. To stop the system unraveling with who knows what consequences, the EU may have to take the strides toward deeper union that Germany has been resisting since this crisis exploded: joint guarantees of sovereign debt and unlimited intervention by the ECB.

The problem is, that’s fiscal union. It commits the EU to potentially enormous transfers among its members, and makes them explicit. Can there be fiscal union of that sort without political union? And do Europe’s divided nations -- the bossy Germans, idle Italians, arrogant Brits and vain French -- actually want to be one country? Back in Maastricht in 1992, the Treaty of European Union arranged things so that those questions would one day have to be answered. Sooner than anybody bargained for, and before Europe was anything like ready, that day has come.

(Clive Crook is a Bloomberg View columnist. The opinions expressed are his own.)

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Today’s highlights: the View editors on how Germany gained from the euro and the problems with the Facebook IPO; Clive Crook on Europe at the brink; Jonathan Alter on political substance and slander; Ezra Klein on the fight over Bain; Caroline Baum on overregulating banks; Tobias Moskowitz on data-driven policy; Panagis Vourloumis on Greek shock therapy; Junheng Li on China’s economic misinformation.

To contact the writer of this article: Clive Crook at clive.crook@gmail.com.

To contact the editor responsible for this article: James Gibney at jgibney5@bloomberg.net.