The United States of Europe

Written by Rodger Mitchell, www.nofica.com

Let’s begin with this basic truth. The nations using the euro struggle for one reason, and one reason only. They surrendered the single most valuable asset any nation can have:  Monetary Sovereignty.

That is the logical conclusion. Yet even more than logic is involved, as discussed by Michael Schuman in Time.  Excerpts from this article are used throughout the following discussion of the when and how of the United States of Europe.

TIME

The Future of the Euro: Why Sentiment Alone Can’t Save the Union

By Michael Schuman April 30, 2012

Being an American journalist reporting on the troubles of Europe is sometimes an ego-damaging experience. I regularly encounter economists, officials and other Europeans who take the attitude that we Yanks just don’t understand the euro. Americans, in their view, simply analyze the euro based on its perceived benefits and costs.

But, I’m told, the euro is much more than a mere economic instrument.  It is a symbol of the grand mission of European integration, a tool to ensure democracy and peace on a continent too often ravaged by war.

The euro, therefore, means more to Europe than mere mathematical calculations of debt and growth can tell us, and the leaders and voters of the euro zone value the common currency based on what it means to Europe as much as what it does for Europe.

I agree, understand and empathize with this. There is nothing like war to encourage strange bedfellows. Russia built NATO. The thirteen original Colonies suffered extreme danger. They compromised. Without the threat from the U.K., I doubt there would be a U.S. today.

Historically, Europe has been the focus of almost continual strife. The very existence of so many countries, so many languages, so many cultures, so many climates, all confined to a relatively small space — a mob of angry strangers crammed into a phone booth — guarantees war.

So, I am sure the love affair with he euro is psychologically, if not overtly, related to the desire for peace.

Unfortunately, the euro nations went only half way. In an inverted “cake-and-eat-it-too” plan (no cake and no eat it), they surrendered their Monetary Sovereignty, but received nothing to replace it.

A sovereign nation should be able to control its currency supply, or at minimum, have an outside source of currency. But who controls Greece’s euro supply, and who provides a source of euros? No one and no one.

Same question for France, Italy, Ireland, Portugal, et al. Who controls their euro supply? What is their source of euros? Being monetarily non-sovereign, these nations cannot control their euro supply, cannot create euros, and have no outside source of euros.

Compare the euro nations with the American states, which also are monetarily non-sovereign. While they too, cannot control their money supply, they do have a source of dollars: The federal government.

When the federal government spends dollars domestically, it adds those dollars to the money supply within states (and when people pay taxes to the federal government, this reduces the money supply within states).

The long term survival of any monetarily non-sovereign government requires money coming in from outside its borders. Germany survives by exporting (i.e. importing euros). The American States survive by having a positive balance of payments with the federal government.

The larger the federal domestic deficit, the healthier are the states. The economic formula is:

Federal Deficits + Net Exports = Private Saving

Further from Time:

On a regular basis, the 17 countries that use the euro manage to somehow overcome their varied and often competing interests to forge sweeping agreements to try to strengthen it. Compare that to the gridlock blocking decision making in the U.S., with a mere two major political parties.

Humans are crisis oriented. We tend to endure modest hardship and danger, rather than change. Only extremes seem to move us.

Today’s two American political parties are in no danger. So, they move away from compromise, vacating the middle.

But imagine a third party rising up and claiming a majority. What would the Republicans and Democrats do?  I suspect they would combine into a “Democan” party, with the slogan, “The enemy of my enemy is my friend.”

Yet at the same time, I have to wonder if that commitment will be enough to preserve the monetary union. Or will the weight of Europe’s economic problems eventually overwhelm the emotional and political connection Europeans have to the euro? In other words, will the euro’s fate be decided by Europe’s attachment to the idea of the euro, or by economic reality?

As I have said for years, the euro nations have two, and only two possible solutions to a problem dragging them down the hole of recession:

1. Return to Monetary Sovereignty by re-adopting their individual, sovereign currencies or
2. Combine into a single republic, ala the United States — a United States of Europe.

Which way will Europe go?

I believe they will follow choice #2, because choice #1 returns them to the ongoing wars of yesteryear.  There will be a U.S.E., the only questions being, when and how.

They might do it gradually. The EU might begin giving (not lending) more euros to each nation. It might begin as a trickle and segue to flood status. This could require no major political changes. The EU, which itself is Monetarily Sovereign, simply could begin to credit each euro nation’s checking account.

Even this modest act would be traumatic for Europe, because of their aversion to inflation. I suspect war paranoia will trump inflation paranoia.

Or the merger could be more dramatic, with the EU functioning more like the U.S. central government, including an elected President and a Congress.

But first, times will have to get bad enough, perhaps not so bad that the euro nations all reincarnate as Greece, but worse than today. A Europe-wide recession, simultaneous with growth on other continents (for comparison), probably would move things forward.

When viewed from a distance, the euro must have seemed an benign idea. “Let’s all use the same currency as a start of more cooperation.” But Europeans didn’t realize they were giving their souls to those devils that lay in the details, only one of which was, “Who’s in charge?”

Having surrendered their Monetary Sovereignty, they now must surrender more of their political sovereignty, to make the whole thing work.

(As opposed to the U.S.’s presidential system, I’d guess the U.S.E. would adopt a parliamentary system. It provides for an easier transition, and it’s what Europe understands. But that may be a long way off.)