Sun, Oct 28, 2012 - Page 9 News List

Eurozone cannot become a United States of Europe

The European Council’s president is once again proposing eurobonds and debt-mutualization schemes — proposals that are dangerous and could destroy Europe

By Hans-Werner Sinn

The motto of the United States of America is: E pluribus unum (Out of many, one). The EU’s motto is In varietate Concordia, which is officially translated as: “United in diversity.” It is difficult to express the differences between the US and the European model any more clearly than this. The US is a melting pot, whereas Europe is a mosaic of different peoples and cultures that has developed over the course of its long history.

That difference raises the question of whether it is worth striving for a United States of Europe — a concept that many refuse to accept, because they do not believe in the possibility of a unified European identity. A single political system like that of the US, they insist, presupposes a common language and a single nationality.

Perhaps the idea of a United States of Europe, the dream of post-war children like me, can never be realized. However, I am not so sure. After all, deeper European integration and the creation of a single political system offer solid, practical advantages that do not require a common identity or language. These advantages include the right to move freely across borders, the free movement of goods and services, legal certainty for cross-border economic activities, Europe-wide transportation infrastructure and, not least, common security arrangements.

Banking regulation is the most topical area in which collective action makes sense. If banks are regulated at the national level, but do business internationally, national regulatory authorities have a permanent incentive to set lax standards to avoid driving business to other countries and to lure it from them instead. Regulatory competition thus degenerates into a race to the bottom, since the benefits of lax regulation translate into profits at home, while the losses lie with bank creditors around the world.

There are many similar examples from the fields of standards, competition policy and taxation that are applicable here. So, fundamental considerations speak for deeper European integration, extending even to the creation of a single European state.

The danger of following such a path always lies in the fact that collective decisionmaking bodies not only provide services that are useful to everybody, but also may abuse their power to redistribute resources among the participating countries. Even democratic bodies are not immune to this danger. On the contrary, they make it possible for majorities to exploit minorities. To counter this threat, democratic bodies invariably need special rules to protect minorities, such as the requirement of qualified majority voting or unanimous decisionmaking.

The decisions taken by the European Central Bank (ECB) are a particularly dramatic example of this problem, taken as they are by a simple majority of a body that is not even democratically elected. The ECB’s decisions lead to a massive redistribution of wealth and risk among the eurozone’s member states, as well as from stable countries’ taxpayers, who have little stake in the crisis, to global investors directly affected by it.

The ECB has been providing virtually all of its refinancing credit to the eurozone’s five crisis-stricken countries: Italy, Spain, Portugal, Greece and Ireland. All the money circulating in the eurozone originated in these five countries and was then largely used to buy goods and assets in the northern member countries, and redeem foreign debt taken from them.

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