Sunday, June 10, 2012

Europe’s 1787 Moment. Or What Comes After Maastricht?

I have a friend who lives a long way away from me.

That distance precludes my going to see him very often.  Family and business requirements being what they are, he is unable to ever execute a reverse trip to where I live.

And it is probably a good thing that we see each other so seldom.

It is probably good because when we are together we consume an inordinate number of martinis.  And that is probably not good for us.

While so consuming we do, however, discuss and solve most of the world’s problems.  Unfortunately we can never remember what those solutions were that we conceived during the martini hours from which those solutions were concocted.

That is probably sad for the world since the world gets not our solutions.  But it is good for us because the forgetting of the solutions and the problems leaves a permanent virgin field of possibilities for endless martini hours with their endless discussions.

I do sort of remember one of those discussions, in spite of all the forgetfulness that may and should have surrounded it.

It was back a few years.  I think it was May of 2007.

We were into our second martini and had only begun with the world and its problems.  My friend had been worrying the subject of America’s apparent plateau of world influence – if not, indeed, its beginning decline – as if the subject were a bone and he were a dog.  At a moment of apparent distillation of his thoughts on this subject he said “For example the EU.  I’m worried about that.  It’s bigger in population than we are and in aggregate has a slightly larger GDP.  And a lot of them – the biggest and most influential of the bunch – all share a common currency.”

It was at that moment that years of reading The Economist paid its first dividend.

“All you say is true and it gives a superficial appearance of impending dominance.  But the whole thing is built on a house of cards.  Each country, including the ones in the Euro can pursue their own individual financial tracks and they can spend money any way they want and even though the Maastricht Treaty supposedly limits their annual deficits to 3% of each signatory's GDP there is no way to enforce it.  Supposedly if they break the treaty and go over 3% stiff penalties kick in. But it’s pure fantasy, I think, to expect Germany, France or Italy – or any of the Euro members - to ever pay those penalties.  On the face of it, if they go over 3% there would need to be compelling fiscal reason.  So adding a big penalty on top of economic difficulty significant enough to cause treaty violations is just not going to happen.  And if some of them get in the ditch their borrowing costs are going to go out of sight since there is no common to the Zone borrowing apparatus.  And that would create an imbalance in the union and make things spiral continually to the worse.  And there is no Euro Zone apparatus to guarantee bank deposits or to gracefully manage the closing, reorganizing and reopening of failing banks.
That’s stuff that none of them want to talk about; if they get forced they dance around it as if it were some sort of ceremonial bonfire, but they never really talk about it.

The only way that thing is ever going to work is if they institute a financial system that will look a lot like that of the United States.  And that could never happen without a governmental system that would look a hell of a lot like that of the United States.”

My friend reached for the martini pitcher and we finished that batch and went on to some other topic.

Since then that bonfire has continued to burn brightly and the dancing around it has become increasingly frenzied.  Bailout has followed bailout and austerity has followed austerity, and recession has followed austerity and the whole thing is like a plane flying up its own tailpipe.

In 1787 the pseudo nation gathered under the Articles of Confederation was confronted with an analogous situation.  They met in Philadelphia to “fix” the Articles.  If you read The Great Rehearsal by Carl Van Doren it is hard not to draw the conclusion that the deepest thinkers and the most influential of the group that gathered – key among them being James Madison – knew that The Articles were useless, could not be “fixed” and that they needed to be replaced with a binding constitution that caused the states to surrender powers that they held dear and sacred, but which, if so held, precluded the emergence of a real functioning nation.  Lacking the emergence of a real functioning nation there would occur a dissolution of the revolutionary union of thirteen into a variety of smaller independent – probably quarrelling and competing - configurations.

Those thinkers ultimately prevailed and a working nation emerged almost as the Constitution was ratified by the states.

Stripping away all the feinting, bailing and bullshit, I think that the European Union, at least seventeen of its member states, are exactly at that point.  They are staring at the abyss just as we were in 1787. It will be fascinating if that apparent historic parallel drives a similar action – a meeting somewhere to “fix” Maastricht” -  by those member states.
It will be ugly for all of us if they don’t.