The European Crisis Highlights the Different Economic Cultures of Europe and the USA - Part II: Perspectives

This post presents the second part of Roland Benedikter’s exploration of the different economic cultures of Europe and the US. For the first part please click here.

In times when rifts between democratic and non-democratic alliances are deepening, as seen at the recent G-20 summit of November 2014 in Australia, Europe and the U.S. have to better understand their different economic cultures in order to improve communication and cooperation.

To make progress in that direction, some facts have to be recognized.

First of all, there are misunderstandings because of differing approaches to addressing the European economic and financial crisis. These differences are influencing not only the economic, but also political and cultural relations. In principle, the U.S. requires the European Union to become more like it - i.e. a stronger union according to the motto “ex pluribus unum”, with similar crisis policies -, whereas the EU wants to be better understood in its own way, i.e. as a “unity in diversity” that applies its own strategies within a more complicated internal setting.

The main background of these differing views is that the U.S. and Europe are based on different historic concepts of monetary, economic and financial policies. While the U.S. tends to see them as a unity, for example by printing money to stimulate the economy, Europe perceives them as fundamentally different fields that should not be mixed but rather be addressed separately. That is the reason why Europe doesn’t want to print Euros to invest them in the acquisition of governmental bonds and the public spending of crisis nations.

The interference between these two basic approaches has long existed, but has most recently sharpened in the framework of the all too long-lasting crisis constellation. Or as U.S. secretary of state Jack Lew expressed it in November 2014: “The European Central Bank has taken forceful steps to support the economy through accommodative monetary policy. But . . . this alone has not proven sufficient to restore healthy growth.” With this, Lew was “highlighting his frustration at Europe’s unwillingness – in particular that of Germany – to use fiscal policy… (Instead), Mr Lew called on countries to use a full range of monetary, fiscal and structural policies to boost growth. “The first two arrows – monetary and fiscal stimulus – contributed to stronger growth in 2013... The third arrow – structural reforms – has not been fully released.”

Without doubt, this U.S. critique has its good points. That is suggested by the fact that Europe itself is recognizing that its policies are questionable or not or still not coordinated sufficiently to get the approval of all member states and thus remain a kind of unfinished patchwork. For example, new EU Commission President Jean-Claude Juncker argued in November 2014 that “Europe needs a kickstart” and promised a 315 billion Euro investment into the European economy to curb new investment and productivity – a measure not far from what Lew has been asking for. At the same time, Juncker admitted that there was no money for such a programme, and that the real amount still to be created at the European Investment Bank (EIB) was only about 21 billion Euro which still has no clear funding basis. The basic capital, as the programme foresees, will be financed through guarantees by the Eurozone member states. That means that in particular Germany will have to guarantee the lion’s part, whereas guarantees from Eurozone crisis nations like France or Italy will most likely not be proportional to their size because of the crisis.

It was not long that German members of parliament in Brussels criticized this programme as a “nutshell without content”, since it puts the weight of the new investment programme on Germany – which is exactly what Lew and his U.S. colleagues in essence requested. With the new EU investment initiative, part of this request is de facto realized, but in a rather hidden manner not to be stated openly in order not to scare the German voters in sight of the next parliamentary elections due in 2017, i. e. in a probably difficult year for the EU since Britain’s David Cameron is planning a referendum about the permanence of the UK in the EU then.

It is exactly the mix of factual measures that are undertaken in a veiled manner in order not to scare those voters of member states who have to pay for it – which are the ones of the winner nations of the Eurozone Germany, Austria and the Netherlands – which is the real problem of Europe’s current zick-zack course between austerity and stimulus that have led to a “mixed” crisis management strategy often unclear even to its propagators.

The phenomena related with these contradictory moves are of course wind in the sails of Europe’s critics. They indeed suggest that “Europe cannot remain what it is” – which is exactly what after seven crisis years and counting even many fierce pro-Europeans are starting to argue. Realistically seen, Europe is in the midst of an at least threefold split: 1. Between EU and non-EU nations, 2. Between Eurozone and non-Eurozone EU-members (for example, the UK) and 3. Between winner and loser nations of the Euro currency, i.e. between Northern and Southern countries within the Eurozone. The differences in wealth, productivity, innovation, economic output and taxation between the Northern and Southern Eurozone members are rapidly growing; and there have come into existence de facto different classes of EU citizens, with deep inequalities with regards to taxation or access to benefits, meritocracy or vertical mobility.

At the same time, the Eurozone austerity policies do indeed – as the U.S. critics argue - not seem to fully produce the needed effects. For example, while Germany in 2012-13 sold its governmental bonds for minus-interests, Italy paid close to 5% although sharing the same monetary zone. In addition, both nations while sharing the same currency competed on the international money markets, and thus the outcome was predestined, as German Federal Minister of Finance Wolfgang Schäuble allegedly pointed out behind closed doors, with most money going to the Northern winner states of the Euro, and foremost to the most innovative and competitive nation Germany. The result is that many citizens (and political movements) in the Southern European nations are increasingly skeptical as to whether they can afford the same currency as globally competitive nations like Germany. The dramatic symbolism of the Italian national industrial icon FIAT expatriating to the UK, i.e .towards the outside of the Eurozone in fall 2014, seemed a confirmation of the fundamental doubts about a common currency without real political union to the vast majority of Southern European citizens.

In response, Europe does not only need reforms in the Southern countries which in principle will have to follow the model of the German Gerhard Schröder reform agenda of 2005 “Agenda 2010” on which Germany’s present success is built upon. It included a liberalization of the labor market, a sharp meritocracy offensive, reforms of the social welfare system and reasonable wage settlements - which is exactly what Matteo Renzi in Italy and Manuel Valls in France are currently trying to do, unfortunately still with poor success due to the strong prevention laws in place that protect the status quo. Counter-moves like that of French president Francois Hollande of introducing a 70% “rich tax” for the wealthy are certainly not helpful since Europe’s taxes are already among the highest in the world (Schröder had lowered them to curb consumption and consumer confidence), and are even rejected by the vast majority of middle and lower class citizens in Europe.

Much more important and fundamental in the long term, Europe needs a true common government and political union to legitimate the currency union. If, as Princeton’s Andrew Moravcsik put it, the Euro currency has started out as a risky gambling game meant to force the European nations to politically unify, it is high time to make up for the lost years in this regard. Since the introduction of the Euro in 2001 no breakthrough in political union has been achieved, and Europe is still far away from being a concrete, convincing and strong governmental union for which the Euro was planned as forerunner.

Or as German chancellor Angela Merkel expressed it in her usual, more pragmatic tone throughout 2014, “the member-states of the European Union must agree much better in terms of economic policies. As of now, the EU nations don’t respect their own programmes, given that rarely one of the indicators, that we ourselves have proposed to guide our policies is being practically respected by the member states.” That means that the Eurozone desperately needs better coordination and tuning with regard to fiscal discipline and crisis management. One feasible option in that direction could be what German Finance Minister Wolfgang Schäuble proposed at the end of November 2014: that the EU should become able to veto national budgets if they don’t conform with the agreements between the member states and the union. That would give the European Union as a super-national endeavor immediately better leverage on the single nation states and increase its importance compared to national governments noticeably.

Second and more concretely, the Eurozone needs an acting, independent European Central Bank (ECB), fiscal unification, an alignment of production and taxation standards, including in particular competitiveness and unit labor costs (like Angela Merkel has been requesting for years now as her “Ceterum censeo” in every European and global meeting), and a joint public sphere and civil religion (or transnational idealism, where the idea of Europe becomes a feeling, as U2’s Bono put it) – all of which are still underway, while the U.S. has all of them and thus finds difficulties to understand why this should take so long (although ironically it took lots of bloodshed in the U.S. to establish it, underscoring that it wasn’t easy there either to form a “full union”). The problems for European unification are the different cultures and languages in one and the same monetary and economic zone that are difficult to conform and to integrate.

Furthermore, the European experiment of “unity in diversity” is, as former prime minister of Saxony, Kurt Biedenkopf, exemplarily pointed out in his book “The Road to the Euro: Stations of a lost Chance”, unique and new in history, never attempted in such complexity and on three different levels simultaneously: regional, national, supranational. It needs time, care and understanding. Although many in the U.S. think this experiment is, both economically and politically speaking, too complex to have a realistic chance to succeed, dialogue on it is essential to improve its imperfect status.

What is the perspective? What future for the Eurozone?

First, the differences between the Atlantic partners U.S. and European Union can’t go on as they did in the past months and years. Otherwise the transatlantic community risks falling behind in international comparison and global development.

Second, Angela Merkel’s warning that reforms in Europe can’t be any longer postponed because “the world doesn’t wait for Europe” is as much the case. This is particularly true in times when on November 27, 2014, the World Trade Organization “clinched the first global trade deal in its history, the so-called Bali package on which the 160 WTO member states agreed to adopt the first worldwide trade reforms after 19 years of stalemate. The agreement means the WTO will introduce new standards for customs checks and border procedures. Proponents say streamlining the flow of trade will add as much as $1 trillion and 21 million jobs to the world economy.“

In order to not let different concepts and the resulting mistrust damage the transatlantic relationship and its standing in the world, and to strengthen mutual economic sustainability in times of rising multipolarity, the West needs better coordination and new efforts of understanding between the U.S. and Europe. But it also needs a much more energetic unification process towards the “United States of Europe” (as different from the “United States of America”), a correction of the recent, all too contradictory European crisis politics, serious and lasting reforms in the Southern Eurozone countries and transparent governmental, fiscal and budgetary alignments. Sustainability in transatlantic economic cooperation then means to align standards in transatlantic ways and to help each other to overcome the crisis. In principle, the crisis is a chance for both the U.S. and Europe to once again move closer, although there are without doubt a variety of problems to be addressed that will not disappear anyway soon.

Roland Benedikter, Dr. Dr. Dr., is Research Scholar at the Orfalea Center for Global and International Studies of the University of California at Santa Barbara, Trustee of the Toynbee Prize Foundation Boston, Senior Research Scholar of the Council on Hemispheric Affairs Washington DC and Full member of the Club of Rome. Previously, he was Long-term Visiting Scholar / Research Affiliate 2009-13 at the Europe Center of the Freeman Spogli Institute for International Studies, Stanford University. He is co-author of two Pentagon and U.S. Joint Chiefs of Staff White Papers on the ethics of Neurowarfare (February 2013 and April 2014) and of Ernst Ulrich von Weizsäcker’s Report to the Club of Rome 2003 titled “Limits to Privatization.” His latest book is “China’s Road Ahead: Problems, Questions, Perspectives” with Springer New York, February 2014.