Europa, Europa?

Flag of the European Union

(Image from Wikipedia)

I've not posted a blog entry on the EU for some time, so maybe the times has come to post again, for I've only this past weekend read two long, informative articles on the European Union's economic and political difficulties.

I first read Paul Krugman's "Can Europe Be Saved?" in The New York Times Magazine (January 12, 2011). I almost never read Krugman's columns, but the subject of this article intrigued me. I know next to nothing about economics beyond the basics, but my interest in European unification requires that I try to learn something. I won't even attempt to summarize Krugman, but I will offer a couple of quotes, the first one explaining the basic problem with that European currency called the "Euro" used in the Eurozone:

America, we know, has a currency union that works, and we know why it works: because it coincides with a nation -- a nation with a big central government, a common language and a shared culture. Europe has none of these things, which from the beginning made the prospects of a single currency dubious.

To see why this is true, read the article, which will clarify that a strong central government protects the economies of the individual states, a common language makes labor more flexibly mobile, and a shared culture insures that different regions can trust each other to act in similar ways. The multicultural entity that is the EU, as Krugman notes, lacks all three of these. No strong central government cushions local economies. Workers cannot easily move from poor local economies to better ones if a different language is spoken. Different regions don't share an identical culture that would ensure trust and predictability. Will we therefore see any countries exit the Eurozone to go their own way? Not likely, says Krugman:

As Barry Eichengreen of Berkeley pointed out in an influential 2007 analysis, any euro-zone country that even hinted at leaving the currency would trigger a devastating run on its banks, as depositors rushed to move their funds to safer locales. And Eichengreen concluded that this "procedural" obstacle to exit made the euro irreversible.

A draft of Eichengreen's article can be read here. I've not yet had an opportunity to read it, but Eichengreen offers a summary here, and it sounds rather persuasive in elaborating on the punishing consequences of trying to leave the Eurozone. The summary also, perhaps inadvertently, succeeds in making the Eurozone sound like a trap that no other EU state would wish to join . . . though that didn't stop Estonia.

The other article that I read over the weekend, "Europe's Odd Couple" by Steven Erlanger, also in The New York Times Magazine (January 13, 2011), describes and analyzes the political relationship between France's le petit Nicholas Sarkozy and Germany's still unfallen Angela Merkel, who apparently can't stand each other but are forced by circumstances to work together to make their 'Union' work together. I suppose that this says something about the maturity of European politicians. But the Union isn't easy, and here's a very big reason why:

The fundamental problem is that Germans are worried that their manifold sacrifices for national prosperity will be dumped down the drain of Europe's poorest and most profligate. Despite Germany's economic success -- almost a second economic miracle, after the expensive absorption of East Germany -- Merkel therefore has serious political challenges. "The Germans have discovered that they are the only serious global economy in Europe, capable of competing with the United States and China," says John Kornblum, a former American ambassador to Germany. "But they're afraid their world is coming apart around them, and what they thought would support them, the European Union, is dragging them down. They realized that the stability pact isn't working, that the Greeks were lying and maybe others, too, that their banks and French banks were deep in the muck, and they understood this is going to cost a lot of money. So they are behaving in a very demanding way, which smells to some like nationalism. But it really is fear."

So while Merkel says she is deeply committed to the European Union and the euro, she must, as a politician, manage the angst.

Politics, however, can only do so much managing. The question is: which way is economics going to pull, apart or together? If Eichengreen is right, the economics of the Eurozone will keep that crucial part of the EU together since to leave is even worse than to belong. But what happens if all the bad things about leaving happen even if a country doesn't leave? Like a run on its banks? We might just find out.

But don't listen to me, I don't know anything. Read the articles for yourself.