This is a letter to an old friend from my undergraduate days, who went on to be a distinguished economist, describing the EU situation today. I am publishing this letter today, nine years after I first wrote it, just after receiving the news of the anger in Southern Eurozone countries against Northern Eurozone countries, when the latter showed unwillingness to consider the possibility of issuing "Coronavirus Bonds" (a.k.a. "Eurobonds"), to help the former remedy the considerable economic disruption caused by the stringent measures taken to confront the epidemic. Eurobonds would entail the joint and several liability of all Eurozone states together to cover the cost of these bonds, i.e. they would be a form of fiscal transfer from the rich states to the poorer and needier ones. This is normal within a single state, that richer areas should help poorer areas. The EU aspires to full Statehood and has adopted a single currency with this aim in view. Unless it also adopts a single, unified, fiscal policy, this aim will fail, or will only succeed at the expense of the weaker members.
You mentioned solidarity [referring to George Osborne's decision to help bail out the Eurozone]. An important concept, and a word that covers two areas of meaning - the sentiment and the act.
I remember strolling round our college cloisters with you nearly half a century ago (!) and we were discussing it, and you were saying that it was one thing for the rich to help the poor out of charity - the sentiment of solidarity, unconstrained. And another when one person had a right to some assistance and the other had an obligation to give that assistance. The latter of course involved taxation, welfare provision by the State, fiscal transfers... And that leads us (led you!?) on to the "dismal science" (can't remember if Malthus said that to Ricardo or the other way round) of political economy... ;-)
The considerations I am trying to make here, on the concept of "solidarity", are not essentially technical, on economics, but more historical and sociological, although of course it is all intertwined. I hope you can spare 3 or 4 minutes for what follows, as I lob a couple of my thoughts over to you. For the act of solidarity - ie fiscal transfers - to function on an ongoing regular basis there has to be an overarching State authority that ensures and indeed enforces it.
Perhaps you were referring to the sentiment of solidarity when commenting on the transfer of resources by Osborne from the UK to help the Eurozone? In any case, it is by now plainly obvious that the EU project aims to set up a single state, and when that point is fully reached, such transfers will be arranged by the single government as a matter of course. There will be acts of solidarity (fiscal transfers) regardless of the sentiment. Economists have long said that a single currency cannot hold together without a fiscal union, a single exchequer etc. In fact the institution of the single currency in 1999-2002 was only to be one step along the path to an "ever-closer union".
But can you have a single state amongst peoples who do not feel that they are to some extent "brothers"? There have been cases, of disparate peoples living together under one rule, but it has never been a democratic rule; it was an imperial rule, where one dominant people used its dominance to suck in wealth from the weaker ones. Democracy, "power to the people", needs a demos, a people who consider themselves to be just that, one people.
India - the "subcontinent" - used to be one country under the British raj, but when independence and self-government came there also came a split with Pakistan going its separate way. Even after that Pakistan itself split up with East Pakistan which became Bangladesh. Were a union between all three countries now to be proposed, with an economically successful India being forced by a single sub-continental overarching state authority to make significant fiscal transfers to assist basket-case Pakistan, do you think this would be matched by a widespread sentiment of solidarity all over India with people saying "Yes, we must help our less fortunate fellow-citizens"? Would there be the same fellow-feeling amongst inhabitants of the "subcontinent" (as I remember there was in the Oxford "Majlis" [an Indo-Pakistani student society in the 1960s]!)? Or would there be riots of protest?
When West Germany united with East Germany, this involved considerable fiscal transfers from West to East, with some sacrifice on the part of the Westerners. There was some bad feeling between them at the time, talk of "Wessies" and "Ossies". But basically there was an underlying feeling of "after all, we are all Germans, all speaking the same language and sharing a very similar ethos - so let us help our fellow-Germans".
Humanity is still basically rather "tribal". The sentiment of solidarity, when it involves significant sacrifice on the part of the donor, is none too plentiful when there is a lack of any underlying fellow-feeling, when the recipient is perceived as somehow "alien". Just look at the religious divisions in the world today. Just look at what happened when Yugoslavia broke up.
This is lamentable. Human beings ought to be able to feel solidarity with other human beings on the basis of our common humanity, regardless of divisions of language, religion, cuisine, marriage customs, physical appearance, or whatever. At present, a few of us do, or try to - not so easy when different groups have diametrically opposite notions of ethics, ie what is right and what is wrong - and this is where "multiculturalism" is running into trouble. However it is to be hoped that one day (?) we will all share enough of a common ethos to want to help one another in times of need. But past attempts to force the process on peoples without their consent or even without their knowledge (as in the UK) have so far ended in tears. The Germans - and the British, and other Northerners - are now being asked to make significant sacrifices to salvage the Greeks/Portuguese/Spaniards/Irish... the "club med" countries.
Funnily enough the division is roughly the same as the ancient one between the speakers of derivatives of Latin (or Greek) and the speakers of languages derived from German. One might say the Irish are to some extent a sort of "honorary" club med members...? (perhaps because they are Roman Catholic?). Europe today is inhabited mainly by two groups of peoples - the descendants of the inhabitants of the Roman Empire (Latin, or Greek speaking), and the descendants of the Germanic tribes that destroyed the Roman Empire. The hostility of the Germanic tribes against the power of Rome was seen over two thousand years ago, when the Germans, led by one Arminius (a.k.a. Herman the German) ambushed the Roman legions of Varro in the Teutoberg forest and annihilated them. It has been said that if Rome had conquered the Germans and colonised them as it did with other subject peoples, Europe today would have a greater degree of that cultural homogeneity which it lacks.
Edward Gibbon (also a member of our same college - did you know!?) described the Church of Rome, which continued the dominance of Rome in a spiritual form for a thousand years after the dissolution of its temporal Empire, as "the ghost of the Roman Empire, sitting perched upon its tomb-stone". When Martin Luther rebelled against the Church of Rome 500 years ago, he was followed largely by the Germanic-speaking nations, while the Latin-speakers remained faithful and obedient to the supreme Pontiff (Pontifex Maximus - an ancient Roman pagan title of the Caesars maintained by the Popes) as before they had held allegiance to the Caesars.
So atavistically the Germans look on the Latin-speakers with a mixture of love and hate – a few centuries after destroying the Roman Empire they rather wished they had just taken it over instead, and indeed they created what they called the "Holy" "Roman" Empire. From Goethe onwards on they have loved to visit Italy and admire the art and the antiquities and soak up the sunshine. But then they have also felt betrayed by the Romans, as Luther felt betrayed when he visited Rome and saw the corruption and the luxury of the Papal court, and indeed as they felt betrayed much later when Italy changed sides in WWII. Their vengeance was always savage and tremendous - they sacked the city, putting it to the fire and sword under Alaric in 410 AD, and then again 1100 years later their Landesknechten sacked Rome in 1527, up to the Fosse Ardeatine reprisal massacre of 335 hostages by Nazi occupation forces in 1943. And while the West Germans may have tightened their belts willingly enough to welcome their Eastern German brethren back into the national fold, they really do not feel nearly enough sentiment of solidarity to suffer deprivations themselves in order to help out the Greeks, or other Club Med members at present. The fact that if the Greeks default it is actually also German and French etc banks that will suffer, simply intensifies the issue.
So, there is this fundamental cultural fault-line running along the European continent. It actually runs right through one country at the heart of Europe - Belgium. The Dutch-speaking Flemings and the French-speaking Walloons are notoriously at loggerheads, having difficulty even in forming one government. The proper way to create a united state would have been (as the USA did) first to create a political union based on the free consent of the participants (and to do that properly you have to have everybody at least speaking the same language first), and then a monetary union to match. However the founding fathers realised that if the peoples of Europe were asked to abandon their national identities just like that, "cold" as it were, then there would be refusal all round. So they had a bright idea, and they thought, if we start with economic measures only, slowly step by step, first coal and steel, then a customs union, then a monetary union... and then there will come a point where people will accept a political union. It may be a point of monetary crisis where they will be told "Either you accept a full political union with fiscal transfers, or your money, your wealth, the Euro, will melt away in your pockets". Such a threat would doubtless stampede people into giving consent to anything.
Yet what the founding fathers failed to foresee was that this mode of proceeding would not help foster the sentiment of solidarity, on the contrary it would cause huge resentment, which would burst out later, savagely. Indeed the Greeks and Irish and others are feeling that the terms of the loans they are having to accept are almost vindictively harsh. And in any case, unsustainable. It is an old principle of economics (!) that you "cannot get blood out of a stone". As you say, the crisis should be faced and dealt with. Simply to assuage it, to stick on a patch, to postpone the moment of reckoning, just makes it worse.
I have no idea what the solution is, now that the Eurozoners have painted themselves into a corner they are stuck with the single currency. I cannot see how any country - whether Greece or Germany - could in practice leave the Euro without causing runs on the banks and other chaos and mayhem. There is the dreadful precedent of what happened in Argentina about 10 years ago. Perhaps the Eurozone would function better if restricted to the more solvent and homogeneous economies of Northern Europe? Maybe the IMF or the G20, or whoever can attempt to arrange these things, should focus on an exercise in damage limitation, ie to make sure that the damage done by the mountain of debt does not spread further than it already has. As a first step.
However it was in any case an ill-thought out scheme, and nearly all the continent's ruling class have invested their all in it for over 50 years now, so they are going to carry on throwing good money after bad (other people's money too if possible) to keep it afloat at all costs. The constant calls for a European "who shows sensitivity to Europe's problems" to head a global organisation like the IMF do not bode well for the continuing health of the overall world economy. It will be a pity if they end up dragging all the economies of the world down into the whirlpool with them.
Rome, 28 May 2011