Summary: The slow fire in Europe slowly moves to a conclusion. From America we cannot foresee what will happen because the news media paints it as a morality play, obscuring the dynamics at work. While we cannot predict which path the peoples of Europe will choose, we can at least understand the causes of the crisis (it’s not a morality play) and the two alternatives. See the comments for updates.
European elites still hope the current crisis drives Europe to unification. The slow-building deterioration since August might result from a conscious decision, allowing events to spiral down, so that the eventual crisis (coming soon) provides the political conditions for bold policy action. Unification amidst mass panic.
Prime Minister Merkel tours Europe advocating unification, requiring large changes to the treaties defining the Union. It’s easy to see why German’s elites support unification. Germany used the European Monetary Union to impose interest rates optimal for Germany — with terrible effects on Europe’s periphery.
- Germany got strong growth and low inflation — at the cost of large loans to the periphery.
- The periphery enjoyed strong consumption facilitated by low interest rates — at the cost of large debts to the core EU nations.
That regime crashed, forcing either fragmentation or unification. Unification looks easier for the periphery, with fewer uncertainties compared to the leap into the darkness outside the EU. Plus Germany and France (desperate to save its banks) exert fierce pressure. The combination of bullying and fear might produce some form of unification.
The next step: a fiscal union
The news media acts as a mouthpiece for the financial industry, so we hear little but the wonderfullness of unification. Understandably so, since the banks see unification as another bailout of their potentially lethal loans to the periphery. Sometimes they explain the perspective of anti-unification German, and of the “technocrats” in the periphery who do the bidding of Germany.
The banks want immediate monetization by the EMU of sovereign debts. That’s not going to happen. A limited monetary union before political union was a bold gamble (now failed). A full central bank — able to directly finance national spending — without central fiscal control would be deranged.
The next step towards unification means central control (in effect, German control) of individual nations’ fiscal affairs. Since Germany used the EMU to rape the periphery (albeit with their ignorant consent), they should expect Germany to do it to them again in a fiscal union. As the AA teaches, insanity is repeating ones actions but expecting a different outcome.