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Chances are that Europe will resemble Italy in the foreseeable future
by Bouke S. Nagel
2013-08-18 12:17:11
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“What fair is foul and foul is fair”
Shakespeare, Macbeth

Over the past weeks OVI-Magazine published several articles about the situation on our continent. Christos Mouzeviris puts his hope in forming a European block. Dr. Anis H. Bajrektarevic argues that we need to look at the wisdom that can be found in the Lisbon Agenda. And Thanos Kalamidas refers to negative stereotypes used by people in the North of our continent. To me it seems that Europe is making use of a recipe developed in the 19th century to create a nation state. And in this text I would like to explore what the consequences are of unifying countries like we did with regions in the past.

Creating a nation

When one aspires to create a nation, one needs to tie regions together. We did it all over Europe during the 19th and 20th century. In doing so we combined parts of our continent that were fairly developed with regions that were still developing. This process furthermore entails that regions have to transfer their sovereignty to a central administrative node or capital within a common regulatory- and legal framework. After unification regions lose their independence and cannot autonomously decide anymore how to adapt to an ever changing world.

A regional- or local economy can only hope and pray that central government is somehow aware of their needs. But central government not necessarily has their best interest at heart. Because its task is to decide what kind of business climate is best for a country as a whole. Therefore it “averages” its policy to suit the “national economy”. Problem however is that an “average” business climate does not exist. Central government therefore is very much like an automobile company at the beginning of the 20th century telling us that we can purchase cars of every colour as long as it is black.

With the creation of a central government also comes the introduction of a central bank. Its job is to manage a one size fits all currency which is called the “national currency”. But local economies have different needs. Some regions need a strong currency while other regions could better have a weaker currency. But this kind of flexibility is not possible within the framework of a nation state. In practice the national currency proves too strong for some regions hampering their economic development, while it is too weak for other provinces, giving their economies a boost.

Something similar is happening in the Eurozone today (1). A European central bank is managing a one size fits all currency for different economies. Unfortunately, the Euro is too strong for countries in the South and their economies and societies are suffering because of it. On the other hand, the Euro is too weak for countries in the North. These countries gained a competitive advantage after the introduction of the Euro, which is good for their exports. It is in the interest of northern countries in Europe for this situation to continue even when it results in problems for societies in the South (2).

Economic crisis

Suppose you live in a region faced with a currency that doesn´t fit the local economy. It means that your economy has a competitive disadvantage. And it is hard to compete when the policy of the central bank is aimed at stimulating the economy of other regions, not yours. It doesn´t take long before local economies in several regions go down. Mass unemployment erupts and you lose your job too. Chances are that you are going to pack your bags and start looking for work in the provinces which are booming since the introduction of the common currency.

An exodus takes place from regions struck by the crisis towards booming provinces (3). Thousands and thousands of people migrate never to return home (4). This translates into budget deficits for regional governments. Because economic downturn coupled with mass immigrations means less tax income. It becomes unattractive to live in the poorer provinces because local governments have to cut their budgets in order to deal with deficits. Migration continues and regions are faced with a shortage in talent, capital, entrepreneurship and workers. Local economies suffer tremendously.

Economists do not see it this way. In their thinking there needs to be a so-called “level playing field”. It means that a central government and a central bank create a common framework in which everybody has a fair chance. But the problem is that a level playing field isn´t fair at all. It does not take into account the differences that exist in our world. Regions that somehow better match the requirements for the common framework are therefore given a competitive advantage. A level playing field is more like a straitjacket severely hampering economic development of regions (5).

So when reality hits and several regions go down within a common framework, economists (and the general public) are stupefied. Newspapers publish long articles in which the richer provinces are compared with poor regions, while neglecting to mention the role of central government or the central bank in it. Moreover, the general public in the richer provinces assumes that the poorer regions must have done something wrong. The people living there must have created the problems themselves. It is a defining moment in the formation of a national identity.

From now on problems in the poorer provinces transform into a moral issue (6). People in poor regions are seen as lazy, backwards or even corrupt, while individuals in the booming provinces describe themselves as virtuous, hard-working and smart. Public opinion furthermore demands that the poorer provinces must be “punished” by strict rules. And one or more governors are appointed to see to it that the poorer regions follow the directives of the capital. But this makes the situation only worse. A similar scenario is unfolding within member states of the EU right now!

Economic destruction

In order to see what is happening in Europe it is perhaps also an idea to take a closer look at the leading nation of Europe today: Germany. When visiting a region near Leipzig a few years ago, I was told a very sad story by a local resident. There used to be a coal- and chemical industry over there but companies in former East-Germany could not live up to standards employed in West-Germany. And those would be enacted within a unified Germany. When politicians celebrated the unification in Berlin, all companies within this region had to close their doors immediately.

In one day 85,000 people lost their job in this particular region in East-Germany and that was just the beginning. East-Germany lost more than 2 million people since (re)unification and this part of Germany has become one of the poorer regions of Europe today. It is a disaster (7) because people left behind in the East have little opportunities and political extremism thrives in such an environment (8). Berlin invented the reunification tax in order to deal with this situation and even today its sends huge sums of money to the East.

An economist explaining this situation would use the term “transfer-union” which means that richer provinces pay for the poorer regions. It can only be applied when there is a demos and people feel that it is their duty to help one another. A transfer-union however also offers richer provinces a framework in which talent, capital, entrepreneurship and workers can be extracted from poorer regions. Richer provinces within a transfer union pay a hefty fee in exchange for less competition. The problem in Europe is that the same thing is about to happen to our continent as a whole (9).

So it gets even worse

Take a look at the EU. It has a flag and anthem. In 2005 there was a treaty presented to us as the European constitution. There is a common currency run by a central bank. There is a central court of Justice. There is European Law and there are regulations imposed on all of us after deliberations in a European Parliament. And some even dream of European army too. It looks like a 19th century nation state in the making. Step by step, unelected officials in Brussels are realizing unification of our continent according to a recipe developed in the heydays of Chancellor Bismarck (10).

The financial crisis seems to be used as a catalyst in order to realize the ultimate goal: the creation of a political union or a European central government. And in doing so we are on the verge of cutting back perhaps even 60% of all economic activity on our continent in favour of the select few such as Germany, Holland or Finland. These countries have everything to gain from this situation and I assume that is one of the reasons why they act so tough during negotiations in Brussels. A Europe in this form is not going to be beneficial for all of us and that is why I would like to summarize my case.

The Euro is a weak currency for the North which fosters their exports. Economic downturn in the new to be created periphery of Europe sparks a massive immigration wave (11). Aging countries in the North are therefore able to rejuvenate and find new sources for talent, capital, entrepreneurship and workers. It also means extra tax income plus additional retirement revenues for governments in the North, while other EU-members are faced with the opposite outcome. Especially investments made in education will not return in taxes (12). The North gains most from lack of competition in Europe.

Quite literally actually, which brings me to the case of Cyprus. The media in the North always speaks of “the financial sector” as if there is only one, but fact of the matter is that Europe has multiple economic cores. And these are supported by several financial sectors. This year the North decided to dismantle a competing financial sector on Cyprus. In doing so it left investors no other choice than to look for new opportunities. And capital moved up North to countries like Austria (13). The North firmly believes it is doing the right thing, while it basically seizes assets without confiscating them.

A new Italy

The question that remains is why. I assume that it has something do to with our way of thinking. Most of us grew up in small nation states in which there is a transfer-union. Within most European states there is only one economic core and one periphery. And I assume all countries in Europe describe people living in peripheries with negative stereotypes. Faced with the issue of unification, we therefore think it is common sense to do it this way. So the context we once created for ourselves in an era long gone has come to define our view of reality in the world of today (14).

My head however got turned upside down when I migrated to Switzerland after which I entered a different environment. Switzerland has a multicultural society. Striking to me is the absence of a strong central state in combination with fairly autonomous regions. It means that when you move over to the next village, one suddenly is confronted with a different tax regime. It sparks competition between local states, resulting in low taxes and friendly civil servants. And direct democracy does wonders too. It took me while to figure it out but Switzerland is a model for what Europe can be.

Despite these facts, I do not see the EU following in the footsteps of Switzerland. Because for that to happen, we need to transfer sovereignty as far down as possible and improve our civil society (15). Given certain historical events however, many Europeans turn into sceptics when presented with the idea that the people should be the sovereign. Moreover, democracy barely exists for more than one generation in most parts of our continent. To me it seems that our democracy has a long way to go before it reaches the level of Switzerland. A change is therefore not likely to happen anytime soon.

Bottom-line is that countries in Europe are losing their hold on the future as a result of austerity policies and migration. And that makes me think about Italy. It was once a patchwork of states that drifted apart after a process of unification. The North of Italy became prosperous, while its South impoverished in a transfer-union. And without legal- and regulatory flexibility (16) something similar can happen to Europe too. Since several EU-members are in a disadvantageous position within this process of unification. So we may well be witness of the birth of a mega-periphery on our continent.


Further references:

1: Public secret number one in the North of Europe is that a return to the D-Mark or the Guilder means a stronger currency. The German press therefore basically accused the leader of an anti-Euro party of suffering from mental illness. “Doesn´t he know that a return to the Deutschmark would severely hamper German exports?” - see also this interview in the Frankfurter Allgemeine. Besides, if we decide to split the Euro in two, the North-Euro would possibly be stronger than the D-Mark, also leading to a decline in exports for countries in the North.

2: This year an IMF report was published which describes the situation in Greece. A journalist in the newspaper Vima in Greece speaks about the country being sacrificed on the altar of the Euro. German magazine Der Spiegel refers to “mistakes” made by the IMF and downplays the role of the EU. The New York Times on the other side of the Atlantic Ocean seems to take the middle ground.

3: Sven Becker, Marcus Dettmer, e.a., Der Deutsche Traum, In: Der Spiegel, Nr. 9., February 25, 2013.

4: Patrick Kremers, Irlands Traum ist geplatzt, In: Die Zeit, July 10, 2013.

5: “For France (as for Germany), a ´level playing field´ in the Single Market has always meant a slope steeply in their favour – the result of the ERM and Social Charter impositions, both intended to keep the `peripheral countries` of the Community in a state of economic weakness and political dependency.” – Bernard Connolly, The Rotten Heart of Europe, Faber and Faber, London, 2012, p. 373

6: Roger Cohen, The Euro´s Morality Lesson, In: The International Herald Tribune, August 5, 2013.

7: Alexander Neubacher and Michael Sauga, Germany's Disappointing Reunification: How the East Was Lost, In: Der Spiegel, July 1, 2010.

8: Author unknown, Not Just on the Fringes: Far-Right Attitudes Increase in Germany, In: Der Spiegel, November 12, 2012.

9: Christian Reiermann, For Richer, For Poorer: Europe on the Verge of Becoming a Transfer Union, In: Der Spiegel, August 1, 2011.

10: Serge Halimi, Moyen Age européen, In: Le Monde diplomatique, N 712 – 60 année, July 2013.

11: Lucy Ash, London France´s sixth biggest city, In: BBC News, May 30, 2013.

12: Pierre Heumann, “Und dann ist der Chef plötzlich ein Deutscher“, In: Weltwoche, May 2010.

13: Saskia Dekkers, Oostenrijk is het nieuwe Cyprus, In: Nieuwsuur, June 15, 2013.

14: A quote by former diplomat and writer Kishore Mahbubani: “We are moving into very uncertain political and economic terrains. It would be foolish to assume that the Western ideological assumptions of the 19th and 20th centuries will necessarily work in the 21st century. It would be wiser to keep an open mind and to challenge every ideological assumption embedded in our minds.”

15: Niall Ferguson, Civil and Uncivil Societies, In: Niall Ferguson, The Great Degeneration, How institutions Decay and Economies Die, Penguin Books, 2012, p. 111-134.

16: Hugo Dixon, Returning power to E.U. nations, In: The International Herald Tribune, Monday, July 22, 2013, p. 18.


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