European disunion

A region caught between global economics and local politics

One of the mantras of the era of globalisation has been that while all economics is global, all politics is local. The problem for the member countries of the European Union (EU) is that they have yet to find a regional solution to this conundrum. Caught between the global implications of the national and regional economic plans that have so far come up to deal with the Eurozone’s debt crisis and local politics that hold back governments from administering the bitter medicine of fiscal adjustment, EU has failed to come up with a regional solution to its economic and financial crises. It is, therefore, not surprising that German Chancellor Angela Merkel and French President Nicolas Sarkozy have once again failed to come up with an acceptable region-wide solution to the problems of Portugal, Italy, Greece and Spain (PIGS). Consequently, the euro has taken a hit, many European banks have come under increased pressure and the markets are in a tizzy.

Even the talk of a financial transaction tax – the much reviled Tobin Tax on capital flows – has put the markets in a spin. But Europe has few options left. The chancellor and the president could not reach an agreement on increasing the size of the bailout fund and continue to resist the idea of a euro-area bond. The problem with the proposed euro-area bond solution is that it will expose EU’s stronger economies to risks that they have avoided so far. Instead of helping the PIGS sail, the euro-area bond may sink the big three — Germany, France and the Netherlands. But that is a risk that EU’s big powers have to take if they wish to save the euro and the Union. While the proponents of euro-area bonds argue that they would restore stability by stopping speculative attacks on the debt of individual euro member states, the critics in Germany and France worry about the higher cost of borrowing they would have to budget for. Resistance to euro-area bonds is strongest in Germany, where Ms Merkel has been unable to secure political support in favour of stronger expression of solidarity with the rest of Europe.

It is now clearer than ever that EU cannot remain stuck where it has been for sometime now — between the economics of globalisation and regional integration and the politics of local and national interest. EU must either break up or patch up. It has to graduate to a new stage of fiscal federalism for the euro and the Union to survive. The problem for Europe is that it has no political leader who can stand up and say this and mobilise widespread support. The idea of European unity has remained stuck at the popular level of free travel, common currency, a single market and a common talk shop called the European Parliament. One of the basic duties of a parliament is to collect taxes and authorise the government to spend. Till EU takes this next step to fiscal federalism, it will remain exposed to the threat of dissolution owing to the debt, currency and payments crises.