Belgium's capital dates back to the sixth century, but today the modern dominates. As the headquarters of the European Union, Brussels is filled with contemporary office buildings overflowing with meddlesome bureaucrats. What began as a system of economic cooperation has turned into quasi-continental government.
But the so-called European Project risks collapse. While establishment elites want more political integration, Europe's financial crisis is turning its people inward. So far the E.U.'s confused response to Greece's fiscal crisis has exacerbated the continent's long-term economic and political problems.
Proposals for European integration go back decades, even centuries. After World War II pan-European cooperation was seen as the best way to reintegrate Germany.
However, the Eurocrats — a mix of politicians, academics, businessmen, bureaucrats, journalists, and others — wanted more. The Common Market was turned into the European Union, with expanded powers. Even that was not enough to transform the continent into a country, a Weltmacht which could act as a great power. Complained French President Nicolas Sarkozy: "Europe cannot be a dwarf in terms of defense and a giant in economic."
A bit like the Israelites of old who asked God for a king to be like other nations, the Eurocrats demanded a president to be like America and China. Explained Wilfried Martens, a Member of the European Parliament (MEP): "the E.U. must be united and able to speak with one voice on the world stage."
But the European people were far less enthused about the European Project. In 2005 voters in the Netherlands and France rejected a new constitution to shift power from member nations to Brussels, reduce the requirement of unanimity for E.U. action, expand the authority of the European Parliament, and create an E.U. president and foreign minister. The measure was repackaged as the Lisbon Treaty, which did not require popular approval, except in Ireland, where the constitution mandates that treaties be put to a vote. Then the Irish said no, leading to a frenzied but successful effort to force a revote — with the "correct" result.
On Dec. 1, 2009 the Lisbon Treaty took effect. Officials believed they finally had answered the derisive question asked by U.S. Secretary of State Henry Kissinger years ago: What is the phone number for Europe?
Now there's a phone number. In fact, there are several phone numbers. But the 27-member E.U. is no closer to becoming a functioning country.
Baroness Catherine Ashton, the High Representative for Foreign Affairs, has made no policy of note and struggled with only indifferent success to establish her authority against other E.U. officials as well as member states. The new E.U. diplomatic corps just adds more Europeans for other governments to talk to.
Herman van Rumpuy was chosen to be president of the European Council, but Jose Manuel Barroso remains president of the European Commission. And member states continue to rotate as presidents of the Council of the European Union; Poland will hold the slot until year end, when Denmark will take charge. No one outside of Europe treats this tri-headed bureaucratic curiosity seriously.
The 17-member eurozone is in even greater trouble. The euro entered circulation in 2002, even though some supporters recognized the danger of instituting monetary union without fiscal union. German Chancellor Helmut Kohl called the system "a castle in the air," but he still agreed to give up the fabled Deutsch Mark.
In fact, the euro's objective was as much political as economic — to drive European federalism. Create the national currency and the nation will come. That was the hope, anyway. Gerhard Schroeder, Kohl's successor, contended that Europeans eventually would have to abandon "some erroneous ideas of national sovereignty." Any problems could be solved by increasing political and economic integration and transferring more national powers to Brussels.
Now the entire E.U. is under siege, with the threat of financial crisis in several countries and spreading "contagion" which could take down banking systems and even national economies. Greece appears headed for a default. Ireland and Portugal also have received bailouts.
Spain's economy is almost twice the size of the other three combined and the government suffers from a rapidly increasing debt load. Moreover, noted the Economist: "Spain shared several of the smaller economies' weaknesses, like a loss of competitiveness and big current-account deficits." Italy, with Europe's fourth largest economy, recently had its credit rating downgraded by three levels.
The conventional wisdom in Europe is that the way to combat too much debt is to issue more debt. The way to transform bad banks is to turn the European Central Bank into a bad bank. The way to respond to opposition to more political integration is to impose more political integration. Council President Van Rompuy summed up this approach: "we'll do more."
European leaders recently agreed to double the European Financial Stability Facility, the EU's bail-out fund. Where is the money to come from? Warned Gideon Rachman of the Financial Times, the bailouts "impose a financial strain on countries that fund the emergency loans but are themselves heavily indebted."
In fact, many Europeans doubt the wisdom of turning the onetime continental free market into a debt and transfer union. Slovakia's government is having trouble rounding up the necessary votes for passage. Malta has delayed its decision. Finland earlier demanded that Athens provide collateral for any Finnish aid.
Moreover, while German Chancellor Angela Merkel won the necessary parliamentary consent, most Germans oppose the bailouts and a majority of Germans want to return to the D-Mark. Bundestag member Frank Schaeffler, a member of the Free Democratic Party, Merkel's coalition partner, has collected signatures from five percent of FDP members requiring a party referendum on the E.U.'s permanent bail-out mechanism. The result would bind FDP parliamentarians and could threaten Merkel's government.
With money goes control, so E.U. leaders want to assert greater authority over members' fiscal as well as monetary policies. For instance, Juan Manuel Barroso advocated a "single, coherent framework to deepen economic coordination and integration, in particular in the Euro area."
Many Eurocrats see Eurobonds as a panacea. Explained Barroso, "Once the euro area is fully equipped with the instruments necessary to ensure both integration and discipline, the issuance of joint debt will be seen as a natural and advantageous step for all." Advantageous for everyone but Germany, anyway, which would share its top credit rating with Greece, whose bonds trade as virtual junk.
European leaders continue to deny that Greece is likely to default. But virtually everyone believes otherwise. Michael Fuchs, the Merkel government's deputy parliamentary floor leader, observed: "Greece is bankrupt. Probably there is no other way for us other than to accept at least a 50% forgiveness on its debt."
Such a write-down would be painful for investors across the continent. The cost would be particularly high for European — and especially German and French — banks, which hold much Greek debt. Also threatened would be the ECB, supposedly the continent's economic guarantor, which has been buying bonds from Greece and other over-extended member nations at face value.
Moreover, the ECB has been lending to weak banks to maintain their liquidity. Concern over the stability of Europe's banks led E.U. finance ministers to promise to recapitalize financial institutions, which means another bail-out financed by already heavily indebted states.
Today everything depends on unending German munificence. Juliet Samuel of CityAM noted that "Markets and European politicians are tying themselves in knots [attempting] to convert junk bonds into triple-A rated bonds. ... Whatever the details, the aim is the same: Brussels wants to underwrite Greek debt with German cash — all without letting the voters know." British Foreign Secretary William Hague was equally blunt, warning: "Germans will have to accept that they are going to subsidize those countries for a long time, really for the rest of their lifetimes."
To keep the money flowing European leaders have played upon German guilt persisting out of World War II. However, Daniel Hannan, a British member of the European parliament, doubts this tactic will work on Germany's young, whose formative experience was the fall of the Berlin Wall, not Adolf Hitler's seizure of power. At some point the German people are likely to say Nein! to subsidizing their more profligate European neighbors.
Moreover, while the Eurocrats may consider extending Brussels' control over member states to be the only answer, doing so would require a new treaty, which would generate fierce and perhaps insurmountable opposition. Germany's constitutional court already has set limits to Berlin's transfer of sovereign powers. Moreover, Great Britain, which refused to join the eurozone, has resisted continental intrusions on its sovereignty. The price demanded by London for its assent to any new treaty could be high: Prime Minister David Cameron indicated the ongoing fiscal crisis may provide Britain "future opportunities" to repatriate some national powers back to London.
Earlier this year the majority of E.U. members said no to a German and French proposal for a "grand bargain" involving greater control by Brussels over deficits, pensions, retirement, and more. Euroskeptic political parties have been gaining strength across Europe. French economists Dagustin Landier and David Thermar argue that "voters opposed this big step towards federalism, and politicians know it."
The obvious alternative is to let Greece default and restructure the Euro, either creating a two-tier currency, divided between strong and weak members, or dropping Greece and other heavily indebted states from the eurozone. However, EU leaders worry that doing so would kill the larger European Project. Warned Chancellor Merkel: "If the euro fails it's not just the currency that fails, but Europe and the idea of European unification." French President Sarkozy, said, "The euro is Europe, and Europe is 60 years of peace on our continent."
The failure of the euro might be complicated and costly, but it would not plunge the continent into chaos. Nevertheless, for dedicated Eurocrats failing to continue European integration would be almost as bad as war. It would invalidate their main political agenda.
Europe is not alone in its economic distress. Washington's public finances are even worse in some ways. However, the E.U. remains a collection of nations rather than a nation, with continental government as distant as ever. Instead of giving the E.U. more power, Europe's leaders should start emptying those imposing buildings which fill Brussels. Europe desperately needs more liberty, not more bureaucracy, and more growth, not more debt.