September 6, 2011

AS EUROPE’S financial crisis mounts, so does skepticism about the sustainability of Europe’s single currency and the European Union itself. France, Germany and the rest have a consistent answer: United Europe will stand, come what may. But given the probable costs, for all concerned, perhaps now is the time to ask: What is Europe for?

European political leaders have not spent a lot of time debating that issue in recent years, at least not publicly. They take the benefits of a united Europe for granted: banishing the specter of continental war; enhancing prosperity through freely flowing goods, labor and capital; enabling the continent to punch above its weight in international affairs; generating a culture whose global appeal rivals that of the United States.

Some called this project “the European Dream.” To an economist, though, it looks like a list of “public goods.” The trouble is that people have an incentive to consume such goods without paying. Greece is only the most egregious “free rider.” At one time or another, everyone in Europe has broken fiscal rules intended to ensure that no country takes advantage of monetary union for national purposes. Indeed, they were enabled to do so because the founding agreement of monetary union included no enforceable mechanism for harmonizing fiscal policy.

If fiscal disunion is what ails the euro, it is said, “fiscal union” must be the cure. This could take many forms: the establishment of a European financial authority, with the power to trump national parliaments on tax and budget policy; the issuance of joint eurobonds, which would make all euro-zone countries responsible for each other’s debts; or the more roundabout mechanisms being tried, such as a Europe-wide bailout fund and periodic sovereign bond-buying by the European Central Bank.

One way or another, fiscal union could indeed save the euro and Europe. But even if Europe overcomes all the political obstacles to such a deal, the foreseeable costs, economic and political, are steep: higher taxes and interest rates in rich nations such as Germany; seemingly endless austerity in less-rich nations such as Greece. Wouldn’t it be ironic if the formula for saving Europe, and the European Dream, involved less democracy and more hardship for Europe’s inhabitants? Unity itself might be a casualty if a perpetual north-south transfer fuels resentment and, possibly, a nationalist backlash on both sides of the payor-payee divide.

You wouldn’t know it from the way European technocrats discuss the issue, but the E.U.’s lack of fiscal union is not a mere question of governance or institutional design. It is a basic problem of legitimacy. It reflects very real differences of culture, language and history across Europe, as well as citizens’ real, if loosely articulated, concerns about surrendering control over their pocketbooks to a distant bureaucracy.

Europe and the rest of the world — including, especially, the United States — benefit from a viable united Europe, capable of harmonizing the continent’s disparate national interests and balancing other large powers in global trade and politics. But the key word in that sentence is “viable.” Europe is in crisis because its politicians promised more unity than they, and the people they represent, were willing to deliver. Or, to put it another way, Europe’s leaders, contrary to what some would call common sense, thought it wise to let Greece borrow money at German rates, while letting Slovakia and Finland have a veto on resolving any crisis that might arise.

Europe’s leaders cannot press on to save the euro without updating their arguments. What they need most is a new sense of realism about the goals of European unity and the means of achieving them.