The collapse of the Soviet empire in 1989 and of the USSR in 1991 have become walled off in Western minds as events from an alien time and place. But they should remind us that the architecture of human governments is not eternal. Communism was once a powerful threat to its capitalist rivals. But when circumstances change, the bright hopes of an age are prone to crash in disillusion.
Europe was a bright political project at the formation of the European Community and again when it expanded at the end of the Cold War. Its purpose was not so much power as peace: truly a noble vision. But that noble project was built on an end-of-history economics, on frozen-in-time free-market notions and on dogmatic monetarism linked to arbitrary criteria for deficits and public debt. In the wake of a global financial meltdown, these no longer serve. Unless they are abandoned soon they will doom Europe as surely as communism doomed the empire of the East.
Europe's structure is also suspended between two stable formations: the federated nation state and the international alliance. This in-between structure is called a confederacy, and it is something that was tried and which failed in North America on two occasions, most recently in 1865. The South lost the US Civil War, in part, because it left too much power in state hands, and so could not in the end raise the funds or the men required to keep its armies in the field. And following defeat, it took almost seventy years -- until Roosevelt's New Deal in 1933 -- before sufficient measures were taken to begin to overcome the dire poverty and economic stagnation of that region. This history too has been walled off in modern minds.
The distinctive combination of millenarian economic ideas and unstable political structure faced a powerful shock from the global meltdown. Faced with vast holdings of toxic US assets, investors sought to cut their losses by selling weak and small sovereigns: Greece, Ireland, Portugal, Spain. Thus yields soared on those debts, while they fell simultaneously on US, German, French and British bonds. There was no sudden discovery that Greece was ill-managed or that Ireland had had an unsustainable construction boom. Those facts were known. The new event was the meltdown, the flight to safety, and the waves of predatory speculation that have followed.
Therefore what happened was a solvency crisis of the banks, as always happens in debt crises. It was true in the 1980s, when the Reagan administration, no less, felt obliged to prepare a secret plan to nationalize all the major New York banks should a single major Latin American debtor declare default. It was true in 2008-09, when preventing the imminent collapse of Bank of America, Citigroup and others trumped all other U.S. policy concerns. It is obvious that the entire recent thrust of European policy has been to find ways to paper over the problems of Europe's banks: with phony stress tests, with new loans, with loud talk, with denunciations of profligacy in Greece or anywhere else -- with anything except an honest examination of what lies at the heart of the problem.
Today Greece -- under a resolute government and against heavy internal protest -- has met the onerous conditions imposed on it. But for what? For loans that are immediately recycled to the European banks, adding nothing to Greece's prospects except more debt? This will not lower interest rates, restore growth, or bring success to ongoing internal reforms. It is an intolerable situation and it will not continue for long.
Along one road there lies a future of defaults, panic, dissolution of the eurozone, and hyperinflation in the exiting countries, with a collapse of the export markets for those that remain. The final consequence will be large population movements -- as happened from the American South. For if Europe insists on reducing its periphery to poverty, it cannot expect those affected to sit still and accept their fate.
Along the other road lies the assumption of common responsibilities for sustained convergence, based on a new economics of mutual support. Along this path sovereign debts below the Maastricht ceiling will be taken over and converted to European bonds and there will be a public-private investment program to restore growth and employment -- as some of Europe's wisest leaders demanded in a manifesto just a few days ago. There will follow in due course the constitutional reforms needed to adapt Europe and its policies to the conditions of the post-crisis world.
Europe must therefore choose, and soon, as De Gaulle said in 1969, "between progress and upheaval." "Entre le progrès et le bouleversement."
James K. Galbraith holds the Lloyd M. Bentsen Jr. Chair in Government-Business Relations at the Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin. His next book, "Inequality and Instability", is forthcoming from Oxford University Press.