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Sarwar Kashmeri

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The European Union's Fort Sumter Moment

Posted: 07/28/11 06:04 PM ET

In 1776, the founding fathers of the United States made a grand bargain to ensure the birth of a new republic. They agreed to sideline the new country's black population, even though the Constitution they were about to endorse proclaimed that all men are created equal. This compromise ensured approval of the constitution and the emergence of the United States, but it also left unresolved the existential issue of racial equality which would eventually light a fuse that would explode at Fort Sumter and launch the American civil war.

Likewise, the architects of the European Union launched their single currency, the euro, with a grand bargain -- currency union without a matching fiscal union. The first ever single currency zone in which monetary policy would be centrally controlled by a European Central Bank, but fiscal policies -- prudent matching of revenue and expenses, budgetary responsibility with central oversight, and the ability to intervene if a euro-zone country ran into trouble -- were left out of the euro equation. That bargain too left a festering sore -- a half-baked single currency -- and ensured a day of reckoning.

Now, with the economic collapse of Greece, that day of reckoning has arrived. The EU stands at the brink of its Fort Sumter moment.

The problems of Greece are truly Olympian. The gentleman's agreement that underpins the euro requires euro-zone countries to keep their budget deficits to under 3% of their GDP. Greece's stands at 150%. And that's just the tip of the iceberg. Tax collection systems are virtually non-existent, its infrastructure is in shambles and the unemployment for Greeks under 25 is a staggering 43%. The country's economic growth is moving backwards. Its productivity is among the worst in Europe, so its products are uncompetitive, and it is incapable of paying its huge debt or growing out of its present situation. Putting it bluntly, just lending Greece money will not accomplish much. Unless the markets sense a collective EU will to stand behind it, Greece is on track to become the European Union's first failed state.

Greece doesn't just need loans, it needs help in re-building its infrastructure, in creating jobs, it needs governmental guidance, budgetary and tax oversight. It needs a prolonged period of expensive hand-holding. Greece needs to become a ward of the euro-zone whose members must collectively nurse the patient back to health by setting up European Union level organizations not just to prescribe the medicine, but ensure that it is taken.

And that is the crux of the matter. The European Union's currency union did not envisage using the wealth of well to do parts of the euro-zone to bail out a failing euro-economy.

There is only one alternative for the EU, if it wishes to save the euro -- a progressively deeper fiscal union. The EU's success is directly related to the willingness of its member countries' to give up pieces of their sovereignty for the common European good. 17 EU countries gave up their national currencies to establish the euro. Now it is time for them to finish the job with a fiscal union.

The other alternative is to continue to transfer money from richer euro countries' taxpayers to Greece through loans with little chance of being repaid. And then stand ready to do the same for the other countries such as Portugal, Spain, and Italy, that may soon be on the EU dole. I do not believe European taxpayers from wealthy, largely northern countries will allow this to happen. When they put on the brakes it will mean the end of the euro. And what then?

The EU is the product of treaties between sovereign countries. It is not a Federal Republic like the United States was at the time of Fort Sumter. President Lincoln could rally the North with all its industrial might to help preserve the Union. A European Fort Sumter would see the EU melt away like ice on a summer's day.

The EU is arguably the most important geopolitical development of our time. The breakup of the EU would be a disaster for Europe, and for the world. Let's hope the EU's leaders use their August recess to think about Fort Sumter, and come back determined to continue on their path of an ever closer European Union.