The Real Reason for the Eurocrisis

Europe has gotten pretty seedy these days

Europe has gotten pretty seedy these days

 

You would have to have been comatose for the past few years to not know that Europe is in a complete mess.  A financial sector crippled by the 2008 crisis, only to be hit with wave after wave of Government debt crises that never seem to stop.  The most recent sideshow was the Cyprus debacle, in which officials actually considered taking the outrageous action of stealing from people’s individual bank accounts to finance bank debts.

But where did this begin?  Some say it is the unified currency.  That view is partially correct, but overall it’s too simplistic.  Others blame wastefulness of the Southern European states.  This too, is mostly horse shit.  The real reason for the Eurozone crisis is one based in political structure.  The crisis is not a financial one, but a political one.

The Eurozone is failing because it is using a failed model: Confederacy.  Confederations have a long history of being utter failures.  Yet amazingly, much like the idiotic gold standard, even smart people still fall for its bogus promises.  America too started out as a confederation, however it soon realized that confederations were utterly inferior to a strong central government.

I will write more on the precise reasons why confederacies are unworkable in later blog posts.  But for now I will stick primarily to Europe.  The confederate structure of the Eurozone is a direct contributor to the debt crisis.  People deride the Greeks for their large welfare state and social services, and of course the merits of such policies can be debated on their own.  However, think of it this way, the economies of many of the Southern European countries like Greece and Slovenia are the size of many US states.  Like the United States there is a unified currency, a unified trade zone and free movement of peoples within the country.

The difference?  The United States has a Federal Government which undertakes certain tasks that the individual states in Europe are charged with.  Imagine if the government of a state like Georgia had to pay for the costs of its own deposit insurance, military, food stamps, medicare, disaster relief, social security, financial and environmental oversight?  How high would the taxes have to be to pay for those things? These are the kinds of costs which Eurozone countries are charged with paying for.  It is no wonder they have a government debt crises, they have to choose between: 1) a lower quality of life from less government services; or 3) taxes so high that it negates any economic benefit derived thereof; or 3) huge deficit spending leading to debt.

To be fair, Eurozone countries like Greece already had high debt levels before going on board with the Euro, but at least with the old currencies the government could inflate their way forward and keep the engine going (I will by the way address the government deficit dilemma in later posts).  Once they got on the Euro however, the weight of the common currency proved to be overwhelming given their debt levels.  One by one countries succumbed to debt crises.

And yet the German overlords still expect the Southern European states to go forward with the austerity regime.  Countries like Spain are still responsible for all of the programs I mentioned above.  If the US had this make up and forced local governments to incur these expenses we would be in the same boat.

The Federal system used in America is superior to the Confederation system used in Europe.  Through an economy of scale, America can use tax proceeds from economic powerhouses like New York to help pay for federal programs in poorer states like Kentucky.  This increases the quality of life for those people and betters the economy by reducing unemployment and burdening private markets with the sunk costs that programs like Social Security take care of.  This pooling of services and reliance on the federal economy of scale brings great benefits and is in all ways superior to the Confederation model that is currently destroying the European economy.

Germany of course is the economic powerhouse that would take up that role in such a situation.  However Germany has been hit with a bad case of euro-skepticism.  Instead they have decided to force austerity on their euro-compatriots until the system reaches a breaking point.  Even then Germany still limits any bail out or change to bare bones “just enough” assistance, giving the Southern States just enough to scrape by for a few more months while their people suffer from a mandated depression.  Unemployment among youth in these countries is higher than the great depression.  It is a crime against humanity.

In order for Europe to get out of this dilemma it must demand that Germany change the terms, they need to create a central power that has actual tax and spend powers.  The debt ridden countries should be allowed to consolidate debt via Eurobonds.  Better yet, convert the debt to equity and use that to form a new Europe wide Federal State that actually fairly distributes the costs and benefits of governance.  Tell the Germans they can have the capitol.  Besides, isn’t owning Europe what they’ve always wanted?  All kidding aside, Federalization and centralization are badly needed to fix this crises, and I’m afraid that until this does occur we shouldn’t expect the financial and political situation to improve much.

My Federalization idea may be overly optimistic, the ethnic division and cultural rivalries in Europe run deep.  But any move in that direction, even the slightest move, will be a positive step forward.  The prejudices of the confederate know-nothings do not change the fact that their bankrupt system is fundamentally flawed.  The power of a strong central state can bring great benefits to all of us.  Unfortunately there are those out there who seek to deceive us into believing that centralization is bad.  They have had great influence over the European elite.  The suffering of the European youth who will grow up with sapped opportunities is on their hands.  Hopefully the world will come to its senses and realize that unification, centralization and federalization are the best way forward, and that only through a strong central state can humanity achieve its full potential.

-The Hobbesian

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