Europe has Identity Issues

French academics love the concept of identity. I’m not sure why this is the case, but it might be connected to their interminable disdain for the British, who generally prefer dispassionately manipulating numbers.

Regarding European identity though, the continent shares both a history (however incongruously participated in) and a more or less common approach to social policy (notwithstanding certain important differences). Additionally, Europeans share the same overcrowded peninsula and a desire not to kill each other anymore. These are some of the examples of identity-convergence on the continent.

Lately, however, it’s become obvious that European identities diverge in many crucial ways. There are many European identities; and the fact that European policymakers conveniently forgot about this while devising the monetary union is one of the main reasons the continent finds itself in its current economic predicament.

One of Europe’s motivations for establishing a currency union was to avoid the speculative pressures that loose capital flows exert on floating exchange rates (obviously, there were political aspirations as well). But by affixing monetary policy without a commensurate fiscal or political affixation, the currency area left itself vulnerable to the real economic imbalances that exist within the eurozone. To take one example, some countries, like Holland and Germany, run current account surplus while other countries, like Greece and Portugal, run current account deficits.* Offsetting deficits leads to borrowing and inflationary pressures. But because deficit-countries couldn’t devalue their currencies and inflate away their debt burdens, their exports, among other things, took a hit. And the cycle continued.

Then there are the historical, political and cultural imbalances. In some ways these imbalances are even more important than the economic ones. Not too long ago some eurozone countries were British controlled, others were Soviet controlled, others were internationally neutral and still others were dictatorships. Such a diverse heritage makes the larger project of identity convergence really difficult. It’s not too hard to understand why the proposed EU constitution failed: cultural affinities in general and attitudes toward the project of European cohesion in particular vary widely.**

Correcting the eurozone’s fiscal imbalances effectively and for the long-term likely will require some kind of recognition of a more inclusive, shared European identity. Sure the ECB could decide to exercise more of its “lender of last resort” qualities and greater fiscal cohesion could be achieved; but this seems like applying a warm compress on an axe-wound. Not only do the citizens of peripheral countries need to identify with those in the core in order for them to agree to painful policy reforms, but citizens of core countries need to identify with those on the periphery if they are to start accepting the practice of bailing these regions out.***

One way for this to happen is for Europeans to stop thinking of such payments as bailouts and start understanding them as simple transfer payments. It’s not a case of Germany subsidizing Greece, it’s a case of the rich subsidizing the poor. And because this model has already been accepted within European states, it’s at least possible that it could be accepted within the eurozone as a whole. But for this to happen, Germans and Greeks would need to stop thinking of themselves as German and Greek and more as European. And is this really possible? In the US, for example, the question of transfer payments gets framed only as a class issue, not as a regional issue. But the question of US identity, w/r/t federalism or con-federalism, was settled long ago.

* Another interesting indicator that great power Yglesias and others have been talking about a lot recently is “primary surplus.” Primary surplus is simply a country’s income minus its spending (without considering interest owed on outstanding debt). Looking at national finances through this lens, a country like Italy, which runs a primary surplus, doesn’t look nearly as depressing as the other PIIGS. Another interesting indicator to look at is worker productivity.

** This variance is often framed, a bit reductively, as a debate between supranationalism and inter-governmentalism. As it’s currently constituted, the EU is a confusing mix of both.

*** Of course, European technocrats could continue to exploit the EU’s democracy deficit and simply force member states to reform. This is likely what will happen; the process of amending EU treaties is terribly long and European elites probably would prefer not to let such important decisions get made at the polls. It’s also possible that the currency union breaks up. I really have no idea what will happen.

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