The Euro-Based Changes In The EU

This past weekend's Wall Street Journal featured a half-page editorial by Brian Carney & Anne Jolis entitled Toward a United States of Europe. It's amazing to me how relatively little attention this major change is receiving in US business and other mainstream media.

Most of us Americans don't really understand the specific limits of the original Treaty of Lisbon which gave birth to the European Union. Among them was, with the birth of the Euro and the European Central Bank, to quote the Journal article,

"each member state would be responsible for looking after its own budgetary and borrowing needs. Going forward, the euro zone's members will stand as guarantors of each others' national debts."

Thus, the title of the editorial, because there is joint responsibility among the EU members for all sovereign liabilities. Very much the same effect as Alexander Hamilton's original plan for the United States government's assumption of all debts of the thirteen member states.

Rather troubling, however, for the Euro and the EU, is the fact that the politicians aren't giving this massive change its due, ramming it through as a "limited treaty change."

On the contrary, France's Finance Minister, Christine Lagarde, said,

"It's a major adjustment. We violated all the rules because we wanted to close ranks and really rescue the euro zone."

Further, Lagarde said that the original Treaty "was very straightforward. No bailing out."

I recalled, with interest, early on in the Euro's existence, that France and Germany were two of the first members to violate the currency union's economic guidelines regarding budget deficits and/or deficits. The rules were, as Lagarde admits, flouted from the very start.

Carney and Jolis cite Germany's one-time Bundebank head, the venerable Hans Tietmeyer, writing,

"that monetary union required 'the degree of solidarity characteristic of a nation.' "

That's a big jump for the EU member states. Unlike US states, most of which have some sort of balanced-budget requirement, however loosely-enforced or defined, formerly sovereign states in the EU were, only decades ago, issuing their own currencies, and running budget deficits even now.

The editorial's authors make the insightful point,

"Economic competition is to be replaced by consultation and cooperation. Whether that is an improvement is doubtful, but it is also, in a sense, beside the point. Europe has chosen its path. The common currency will stand or fall based on the ability of the EU to impose ever-more intrusive spending and taxation oversight on the euro zone's members. Does Europe have the necessary solidarity for that to succeed where less coercive measures have failed in the past?"

The transition from common currency to facilitate individual competitive advantages among the EU members, to its use to enforce top-down budgetary and taxation policies, is a sea-change. Even the US does not have this wrinkle in its Constitution.

The EU's members are much more ethnically distinct, and more recently, than are US states. I've always thought that this reality would prohibit a truly-shared fiscal and monetary union in the EU.

Now I guess we'll see whether I, and so many other observers, are correct. The effects of Euro failure aren't clear, but one has to suspect, if the establishment of the Euro brought so many benefits, its disappearance would reverse those, and bring new costs for the member states and businesses operating therein.