European Union is Close to Collapse

Wednesday, 23 Nov 2011 11:13 AM

By Herbert London

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At a 1999 conference sponsored by the Hudson Institute at Weston Park in England, Margaret Thatcher was asked her opinion of the European Union. She replied, “It begins with false assumptions and will die of illusions.”

Thatcher as one of the advocates of Euro skepticism, hit the nail on the proverbial head. We are witnessing the unfolding, the dismemberment of a grand experiment conceived in well meaning ideas, but fatally flawed by a false analogy.

Proponents of the E.U. such as Henry Kissinger argued it is far better “to make one call to Europe than many.” The notion that Europe could be one nation like the United States overlooked tradition, culture, language, even the consent of the governed. When the U.S. faced the issue of unity, Jefferson said he would consent to the assumption of Massachusetts’ debt if the capital of the new nation were located adjacent to Virginia. It was possible with a nation being formulated to make deals unrelated to an indelible past. Europe has had no such legacy.

What Europe did have was a series of assumptions about Germany. After World War II the Allied powers believed Germany had to be restrained as a giant Gulliver. The division of this nation into east and west was one constraining condition. It was also believed that if West Germany could be integrated into a European system, its imperial impulses could not be unleashed.

Even German chancellor Helmut Kohl believed responsible German action was possible only in the company of allies. He called for a European Germany, not a German Europe, albeit history often has an ironic ring to it as recent events in Europe suggest.

With unification of the Germanys, NATO adoption, and the introduction of the euro, the plan for integration was seemingly put in place. Germany was sealed as a member in good standing of the West. But the West itself was unsettled.

Cradle-to-grave security gave Europeans the impression they did not have to work in order to receive benefits. Less than half actually work and in southern Italy work has been unknown for three generations. With lavish benefits, that Europeans came to expect, came a demographic nightmare in which birthrates fell well below replacement level. Who pays and who gets became a question every European leader had to address.

For more than a decade, sovereign debt exceeded aggregate GDP with politicians unable to control expenditures. To do so would have translated into electoral defeat. So the illusion continued until the annual deficits piled so high they could not be ignored. Here is where the default scenario begins.

Greece, Portugal, Spain, and Italy have accumulated debts that cannot possibly be met by the IMF and the European Central Bank. Default is the only real option, notwithstanding bandaids such as the refinancing of the banks.

The upcoming German election will offer some glimpse into the future. Germany is the most successful economy in Europe; but as much as Ms. Merkel would like to retain the E.U., she realizes there are limits to what Germany can do and is willing to do. This election will be a referendum on the union with Merkel’s adversaries asking whether a hardworking entrepreneur in Hamburg should be supporting a shiftless welfare recipient in Palermo. If the answer to this question is yes, Merkel will be defeated and Germany will soon be on the poverty line with Greece.

There is little doubt that European socialism has failed. Welfare, as the Europeans experienced it for at least two generations, is over. Austerity is in the air, so too is serious discussion of a return to national currencies. How can Europe even pretend to be democratic when political leaders cannot exert control over fiscal and monetary policies? The euro will be the dead canary in the European mine destroyed by irresponsible spending.

What Europe needs is not a bailout from the Chinese or the Americans or even the IMF, but pro-growth policies that liberate European ingenuity from the shackles of onerous regulation and extortionate taxes.

The pleasure ride Europeans enjoyed is behind them. Now they must roll up their sleeves and let the hard work begin. To do any less is to relegate Europe to the ash heap of history, a wonderful museum with a dead present and an empty future.

Herbert London is president emeritus of Hudson Institute, senior fellow at the Manhattan Institute and author of the book "Decline and Revival in Higher Education" (Transaction Books).

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