Common Cents

Europe’s wrong turn

Ralph Murphy

(8/2013) The recent decision to admit Croatia into the supranational European Union (EU) is a bold step by a struggling body that appears ready to perpetuate the myth of a politically and economically united Europe. Croatia is now the twenty-eighth member of an organization plagued by debt, security, and immigration issues. As one German theorist recently lamented, it is "an unfinished federal state!"

It all started innocently enough when a group of six nations including economic, "heavyweights" France, Italy, and then West Germany pooled certain heavy industries to create the "European Coal and Steel Community". That was back in1951. By 1958, the group brought in new European members, and expanded their mandate to include low, internal trade barriers; launched external tariffs and quotas and renamed themselves the European Economic Community or EEC.

A common market can be helpful and productive - and might initially be viewed as a neighborly gesture. At the time, the United States' multi-national corporations in Europe were the second largest economic entity in the world - following the American domestic economy itself. And the Europeans appeared to want to be more competitive. There was still a semblance of sanity to the organization.

In 1973 - Denmark, Ireland, and England were talked into joining, and the EEC gained momentum. Greece joined in 1981 followed by Portugal and Spain in 1986. In 1990, the German Democratic Republic (East Germany) was incorporated into the Federal Republic of Germany (then West Germany). Shortly after that, well-meaning visionaries with a goal of a united and productive Europe, or opportunists who saw a chance to penetrate hitherto inaccessible markets. They devised and sold the "Maastricht" treaty in 1992 that created the European Union or EU. The treaty was primarily created by German Chancellor Helmut Kohl and French President Francois Mitterrand.

The EU policies brought political as well as economic integration to member nations. From its inception, it sought to ensure the free flow of labor and capital between these disparate bodies - acting as if it were one country. A country with many different cultures and over 150 languages and dialects. The countries were symbiotically tied, and continued to function as a single, global entity drawing in Austria, Finland, and Sweden by 1995.

EU members have freely surrendered much of their sovereign, political powers such that "the EU has exclusive competence to make directives and conclude international agreements when provided for in an (EU created) legislative act." The Union also exercises "shared competence" to the degree that "member states cannot exercise competence in areas where the union does so to include internal markets, social policy, or agriculture and fisheries." Berlin, Paris, and others - including London, that is currently debating its EU commitment, are given "free reign in research, technology, development and space." The European Parliament allows the EU to coordinate "economic, environmental, and social policies" and further asserts that "common foreign, security, and defense policies" are in the EU’s domain.

The EU doesn't have a common military- yet. In fact, 22 of its members are still in NATO, but that also could change. The organization’s breadth clearly goes well beyond economic integration, and is far removed from the humble vision of a "common market".

Throughout most of the '90's the EU was still palatable to its members, which initially benefited from its larger market and protection from non- member products. In 1999, however, a single European currency, the Euro, was approved and entered into circulation among 17 member countries in 2002. This tied the member nations in a way that if one defaulted on a sovereign debt- all would be affected. Not just the transgressor nation.

In 2004, East European countries, Cyprus, and Malta increased the number of EU members, but were relatively weak economically and probably profited more economically than did the EU itself. The system plodded along, until 2007 when Euro Zone member Ireland needed a bailout after six major banks failed.

Due largely to a dramatic drop in property values. The Irish economy collapsed in 2008. Much the same happened in Spain. By this time, In fact, 8 of the 18 Eurozone countries were in economic crises. These economic crises led to political crises as well.

If a Euro member nation had been acting independently, the impact of their crisis would have been contained. But, when they acted within the structure of the EU, their problems became Paris and Berlin’s problem as well. Brussels is the Headquarters for the Executive arm of the EU, called the European Commission, but Berlin appears to run the Frankfurt based European Central Bank, and was forced to react to the peripheral, economic crises.

Portugal, Spain, Italy, Ireland, Greece and by connection Cyprus taxed the resources of the more developed Euro member nations which created the European Financial Stability Facility (ESFS) in May of 2010. This was done to address the lending problem via low interest rates for borrowers, and bond sales on the public market to provide cash to the debt-ridden Euro members. The International Monetary Fund was also used, despite the fact that the IMF was originally designed for third world crisis management. The IMF is provided its funds by the international community, so every creditor nation is helping pay for Europe's folly.

Cognizant that Europe is facing a long term, debt stabilization problem, the European Stability Mechanism (ESM) was created in late 2012 following German government approval. The ESM set aside 500 billion Euro's ($1.33 dollars to a Euro) for quick action in the case of a default, and this "firewall" funding must be reported to the Bundestag when used.

Ideally, individual nations produce and sell internationally based on their resources and where they enjoy a "comparative" or "absolute" advantage in production. Basically - what they're good at producing. The EU believes it can politically and economically unite (under one flag) a diverse group of over 500 million members in 28 countries… speaking 150 different languages. Quite a challenge while trying to operate in the black. Robert Frost probably said it best when he wrote "good fences make good neighbors"!

Ralph Murphy is a former member of the CIA Headquarters Staff in Langley, VA.