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.
* Cross-posted from newdeal20.org, this piece originally appeared at the Deutsche Welle website.
Also, why was the North more technologically advanced than the South?
Do you think that will happen within the next few years?
The heart of the problem is not the structure of the EU, but how these countries have been managed. You see there is something that the socialist don’t understand. They believe that all they need to do is redistribute the wealth and all of the problems will be solved.
What they fail to recognize is that there is not enough wealth to fully redistribute around to meet all of the wants and need of the people. The only way to achieve true prosperity and begin to meet the needs of a people is through the creation of wealth. Borrowing money on the anticipation of the future creation of wealth is fine, but only to the point that one has the ability to pay to back, and that the borrowed money is actually put to the purpose of creation of wealth. You know that return on investment thing.
Overspending by governments in the political pursuit of providing everything to everyone is in the end going to be the down fall of the EU.
People shout the most simplistic explanations, confusing correlation with causation and make it sound like they have discovered the wheel.
Any person with common sense can see that their house of cards is beginning to falter.
Let it go, Mr. Galbraith. Before growth comes deconstruction, the clearing of space, the carting away of debris, the implosion of old buildings that are in the way and yes, the European Union and its currency are in the way. DeGaulle was talking about internal progress or upheaval inside France, but what a surprise, the intellectual revolution of those days swept away DeGaulle's absolutism and opened economies and lifestyles around the world, economies and lifestyles that have evolved (there's that word!) into timid, neo-absolutist ideology.
And so a fresh house-cleaning is upon us. Let the European Union join the Soviet Union in the wonderful parade of Yesteryear while the internal migration of peoples continues to reorganize all Europe into whatever the future proposes. In the past, European Discontent resolved itself with hoards of poor and huddled masses longing to breathe free as they packed up and sailed away to the Americas. This time, O Europa, that won't work.
Now if the US would only take that lesson and boot the Progressives out on their Ivy League a&& perhaps we can avoid the same fate.
But I doubt it, because OUR Progressive/Socialist are soooo much smarter than the European breed of socialist. George Soros says so.
He is not saying that at all.
As a matter of fact he is being critical of the private financial sector forces that have caused this crisis, and the inability of a confederacy to deal with these problems.
You could far more easily make a case that the financial meltdown and subsequent bailout proves that capitalism, without the aid of govt, cannot sustain itself.
Your disdain for the (quite successful overall) European model has blinded you.
Government intervention caused the crisis in the first place. Government distorted the mortgage industry.
Just because the taxpayers had the ability to bail out the system after government messed it up does not mean capitalism is under indictment... It means our 'mixed system' is a failed model.
Also, Europe is failing on the most important issue for it's long term survival... sustainable birthrates.
It seems your disdain for the (Constitutional) American model has blinded you.
Wait up there! Canada is a Federation.
Simple laws, that are easy to follow, and don't change every three months, are also easy to enforce.
We only need gigantic government if you want to unconstitutionally micromanage every aspect of business behavior, like you do.
Sorry, I could not resist.
This corrupt hydra's dissolution was fait acompli as the ink dried.
The hubris to think this top down inorganic IMF monstrosity of disparate scale could be somehow cobbled together into a singular entity was a staggering delusion of the first order (but one helluva marketing pitch). In the end the North will prevail again but the post economic-war and ensuing "Jim Crow" laws will have the predictable and divisive effect. No, the only real seeds of these sorts of confederations lie in ember to erupt later in places like Australia, Western Canada, or alienated provinces who are following the ever increasing upward aggregation of economic rents and rediscovering Sun Yat Sen and George.
But this time around the union is mainly on paper and in computer digits.