Financial Times, July 13,2011
The European Union was brought into existence by what Karl Popper called “piecemeal social engineering.” A group of far-sighted statesmen, inspired by the vision of a United States of Europe, recognized that this ideal could be approached only gradually, by setting limited objectives, mobilizing the political will needed to achieve them and concluding treaties that required states to surrender only as much sovereignty as they could bear politically. That is how the postwar Coal and Steel Community was transformed intotheEU—onestepatatime,understandingthateachstepwasincompleteandwouldrequirefurtherstepsinduecourse.
The EU’s architects generated the necessary political will by drawing on the memory of the Second World War, the threat posed by the Soviet Union and the economic benefits of greater integration. The process fed on its own success and, as the Soviet Union crumbled, itreceivedapowerfulboostfromtheprospectofGermanreunification.
Germany recognized that it could be reunified only in the context of greater European unification, and it was willing to pay the price. With the Germans helping to reconcile conflicting national interests by putting a little extra on the table, the process of European integration reached itsapogeewiththeMaastrichttreatyandtheintroductionoftheeuro.
But the euro was an incomplete currency: it had a central bank but no treasury. Its architects were fully aware of this deficiency, but believed that when the need arose, the political willcouldbesummonedtotakethenextstepforward.
That is not what happened, because the euro had other deficiencies of which its architects were unaware. They labored under the misconception that financial markets can correct their own excesses, so the rules were designed to rein in only public-sector excesses. Even there,theyreliedtooheavilyonself-policingbysovereignstates.
The excesses, however, were mainly in the private sector, as interest-rate convergence generated economic divergence. Lower interest rates in the weaker countries fuelled housing bubbles, while the strongest country, Germany, had to tighten its belt in order to cope with the burden of reunification. Meanwhile, the financial sector was thoroughly compromised bythespreadofunsoundfinancialinstrumentsandpoorlendingpractices.