Speech delivered to the Centre for Independent Studies (Sydney), 12 March 2012

The European crisis we have been witnessing from afar for the past three years is not an ordinary recession. It is not even an ordinary depression. In fact, it is not even an ordinary economic crisis.

Daniel Ben-Ami has succinctly explained the fundamental economic problems facing Europe today – and I completely agree with his analysis. Rather than repeat his thoughts on the economy, I will instead talk about the political dimensions of Europe’s crisis.

Having a British journalist and a German economist at an event on Europe in Australia is of course an intriguing combination. And having us agree on most issues is even more surprising.

That is because when Brits and Germans talk about Europe, they usually mean different things.

On the British side of the channel, Europe is thought of as the European Union monster: The bureaucratic authority that robbed the British of their imperial measures, threatens to disallow them from calling Cadbury bars chocolate, and can in no way substitute for their lost Empire over which the sun never set.

When the Germans talk about Europe, they have something completely different in mind. It is the place that, for a long time after the Second World War, had offered them a kind of Ersatzidentität – a ‘substitute identity’.

For obvious reasons, being German was deeply embarrassing after 1945. But being entirely without a collective identity was not a pleasant option either. So the Germans were happy to relinquish their old nationalism and seek refuge in the construct of a ‘European’ identity.

Here is a simple test you can apply on someone who strikes you as somehow German. Ask him where he is from. If his answer is Europe, then you know that he is from Germany. No Frenchman, no Italian, no Spaniard – and least of all an Englishman – would ever dream of calling himself European.

So the European Union was a bureaucratic intrusion for the British, and it was a self-help group for the Germans. But what was it to the other nations in Europe?

I would say it was an insurance policy to the French, who are forever afraid of their big and uncultured neighbour to the East – Germany, of course. It was a get-rich-quick scheme for the Irish and the Greeks. It was the only way for tiny Luxembourg to become a diplomatic superpower. It was a source of regional subsidies for the Italians.

And for all the politicians past their use-by date, the European Union was a comfortable early-retirement home. If there had been no European Union, it would have to be invented just to provide employment for the likes of Jose-Manuel Barroso, Martin Schulz, Catherine Ashton, and Herman van Rompuy.

Polemics aside, it makes sense to see the European Union as what it is, not as what it wants to be seen. It is not an enlightened structure, based on noble virtues, void of any national interests, free from the ugly world of politics. It is not a benign project to promote perpetual peace and international understanding. Deep down, the European Union is a product of plain and simple realpolitik dressed in the language of progressive supranationalism.

It is worth recalling the way the European Economic Community, the predecessor of the European Union, came into being. Of course there was a genuine spirit of reconciliation in the 1950s, particularly between France and Germany. The two countries had gone to war three times in less than a century, and the younger generations on both sides wanted to overcome this brutal rivalry.

This is the official founding myth which the European Union likes to emphasise. But it is not the full story.

What really happened in the immediate aftermath of the Second World War was a lot less romantic. The main lesson from the inter-War period was that punishing a defeated Germany had ended in disaster.

So to avoid repeating the mistakes of the Versailles Treaty, they chose a different approach. Instead of controlling Germany by isolating it, humiliating it, and punishing it, Germany was to be integrated into a European framework.

Seen from this perspective, it is immediately clear why European integration started with the European Community for Coal and Steel. The key industries of coal and steel were crucial for energy and defence. Any attempts of German remilitarisation could be thwarted quickly by keeping a close eye on these two industries.

The rise of Soviet communism was another factor that supported moves towards Western European integration. The confrontation between East and West led to the formation of blocs with clearly delineated spheres of influence. The US-led West confronted the Soviet-led East. This confrontation reinforced regional integration on both sides.

Most visibly, the forces of political confrontation played themselves out through military pacts such as NATO and the Warsaw Pact. But the rivalry of the systems also occurred on the economic battlefield — such as the Marshall Plan and the European Economic Community in the West against the Council for Mutual Economic Assistance, also known as the Comecon, in the East.

A policy of demilitarising and weakening West Germany would have been counterproductive from the point of view of the Western powers. It was far better to make West Germany a valuable ally in the Western European bulwark against the Soviet threat.

This also explains why the United States actively encouraged the process of Western European integration from the very beginning. It was not just, to quote Henry Kissinger, the wish to have only phone number to call Europe rather than consulting several dozen foreign ministers. The Americans were trying to solidify the Western front against the Soviet sphere of influence.

It makes a lot more sense to consider the foundation of European institutions in this light rather than pretend it was some innocent pan-European get-together. It wasn’t. It is fair to say the idea of European integration was a product of the Cold War.

Of course the process of European integration in Western Europe soon developed a dynamic of its own, moving away from its initial function as a tool within the Cold War framework. However, this does not mean the events of the following years were less driven by power politics.

This leads us straight to Europe’s monetary crisis. Just as with the founding of Europe’s integration project, there are myths surrounding Europe’s monetary union as well. If you believe the sombre declarations of European politicians, the Euro was meant to deliver all sorts of economic benefits to the continent. It would increase competition in European markets; it would improve price transparency across borders; and it would reduce transaction costs.

But once again, if you look more closely you will find that behind the façade of supposedly good economic policy – other interests were at play.

In this context, I would recommend the recent book The End of the Euro by Belgian economic journalist Johan van Overtveldt. It contains a long chapter on the pre-history of the euro that reads a bit like a crime story. Its plot is about the fight over economic and monetary policy in Europe. At its heart was the question of which nation should determine the shape of economic policy in Europe, and whose economic philosophy should prevail. The euro was the end product of this fight.

The story is complicated but it can be summarised like this: In the first half of the 20th century, Germany had experienced two periods of extreme inflation. The first happened in the Weimar Republic, and the second was after the Second World War, when the old Reichsmark became virtually worthless. In both cases, new currencies were introduced, but German savers twice lost a substantial share of their capital in the process.

As a consequence, West Germany put great emphasis on the need for monetary stability. When it came to inflation, the Germans were twice bitten and a million times shy. So they established a new central bank, the Bundesbank, and gave it complete independence to achieve its sole task of ensuring price stability.

With its focus on fighting inflation in its tracks, Germany was different from many other European countries. In France, Italy and Britain, there never was the same orthodox commitment to monetary Puritanism as in Germany. Therefore, other European countries were under constant pressure to devalue their currencies against the strong and hard Deutsche Mark.

Unsurprisingly, Germany’s economic dominance did not please its neighbours. In the second half of the 20th century, West Germany certainly wasn’t a military threat in the region anymore. But it was an economic threat, and it was often seen as an economic bully.

In his chapter on the prehistory of the euro, Overtveldt explains quite eloquently how the idea of a monetary union for Europe was born under these circumstances. And he also shows how unpopular this idea had always been with Germany’s political and economic elites. They clearly understood that monetary union was meant to curb, or at least to contain, their intra-European power.

Perhaps the other European countries would have never succeeded in beating Germany and its powerful Bundesbank into submission if it had not been for Germany’s reunification. When the Berlin Wall fell in 1989, German Chancellor Helmut Kohl was eager to seize the moment and unite the two parts of the country. But to do that, he had to overcome enormous resistance. British Prime Minister Margaret Thatcher was fiercely opposed to the reunification, as was French President Francois Mitterrand.

There is now good evidence of a deal struck between Germany and France. France would accept the creation of a united Germany in return for a German surrender on the monetary front. And so the Deutsche Mark was sacrificed on the altar of unification.

Once again, the narrative of morally superior motives allegedly guiding the actions of the European Union falls apart. The introduction of the euro had nothing to do with rational economic policy or realising efficiency gains and everything to do with the struggle for power by European nations.

The lofty and idealistic myths perpetuated to make the European Union more palatable always acted as a façade to ongoing power struggles. Looking behind this façade we can see the current European crisis in a clearer light.

Some non-European observers are surprised why Europe ever embarked on an economic adventure as crazy as uniting completely different countries like Greece and Germany, Spain and Estonia under one currency. But perhaps it was not so crazy after all. To be clear, it didn’t make any economic sense. But it certainly followed the inner logic of European integration – which had always been driven by considerations other than economic efficiency.

It is high time commentators on Europe take the gloss off the European project. Way too often, European politicians are getting away with false declarations of ‘European solidarity’, ‘joint responsibility’, and ‘historical duties’ when in fact they are just pursuing national interests.

Take Germany’s actions in the Euro crisis. Chancellor Angela Merkel keeps repeating her mantra that Europe will fail if the Euro fails. She assures the Greek people of German solidarity – in return for Greek commitments to fiscal discipline, of course. She also elevates the question of ‘saving’ the Euro to a question of war and peace.

All this strong rhetoric disguises the fact that the whole exercise of saving Greece has nothing to do with war and peace. In fact, it is not even about Greece. The theatre surrounding the Greek bailout packages – deep down – is about something else.

It is about saving banks, insurance companies, and pension funds that had invested money in Greece. It is about not risking the reintroduction of a German currency. If that happened the French would feel threatened again, while the Germans would lose the competitive advantage of an undervalued currency. And that is something that the Germans, the world’s second-largest exporter after China, are deeply afraid of.

So Greece had to be ‘saved’ because it benefitted everyone else. And this also explains why ‘saving’ Greece is not the same as ‘helping’ Greece. How could Greece be helped by keeping it in the eurozone? Two years of bailout packages and austerity programmes have proven the failure of this approach to solve the Greek problem. That it is being continued clearly shows it is not about Greece.

This points to the fundamental problem about the European Union in its current form. What it seeks to achieve, it mainly does because it suits the interests of its individual member states. But the structure that it has chosen for itself is the structure of a nation-state.

The institutions of the European Union certainly resemble those of a nation-state. There is a government in the form of the European Commission. There is a legislature in the form of the European Parliament, and there is a judiciary in the form of European courts in the place of High Courts or Supreme Courts.

There is only one problem with this. The institutions of a nation-state first and foremost require a nation. And for a true democracy to work, you need a demos – a people. The European Union does not have this people. No one self-identifies as European – with the possible exception of those Germans still too ashamed to be, well, German. But the majority of Europeans self-identify as Czechs, French, Swedes or Italians.

Mark Steyn recently summed up Europe’s problems quite wittily when he said the core problem was that it was impossible to convince the Swedes that the Greeks were not foreigners to them. Sounds trivial, but that is indeed the fundamental problem.

Making the European Union work would require first overcoming the national and cultural differences within the continent. I would argue that this is undesirable in any case, but I also believe that for all practical purposes it is virtually impossible.

Observers have often said the monetary union cannot work without a fiscal union. And that’s true. But for any fiscal union to be accepted by the public, it takes much stronger bonds between citizens than those currently present at the European level.

In nation-states, there is usually a degree of horizontal fiscal equalisation. In non-technical terms, it means the wealthier parts of the country are supporting the poorer parts of the same country. Think of Northern Italy’s contributions towards the Southern Italian mezzogiorno. Think of West Germany’s transfers to East Germany after unification. Think of South England’s support to much poorer places in North England such as Liverpool. Think of the redistribution between the states of Australia.

Even within nation-states, such horizontal fiscal equalisation procedures are often controversial. There is growing unease in West Germany about funding the East, particularly as there are now East German cities that look prettier than some parts of old West Germany. Resistance against subsidies for the mezzogiorno – or the poorer southern Italy – led to the rise of the separatist Lega Nord party.

But if horizontal transfers are that tricky within nation-states, they are even more unpopular in an artificial construction lacking a people with a shared sense of community.

In the last vote on the Greek bailout, Chancellor Merkel could not even get a parliamentary majority of her own coalition and had to rely on the opposition instead. In the Netherlands, the right-wing populist party of Geert Wilders has called for a Dutch withdrawal from the Euro. In France, presidential candidate Francois Hollande has signalled his opposition to further rescue packages.

So there is growing resistance to the official EU policy of trying to keep the Euro alive at all costs. Again, it comes down to conflicting national interests. Is it more expensive to deal with a break-up of the Euro? Or is it more costly to keep it? Do strategic national considerations justify contributions to countries like Greece and Portugal? Or is it too risky to reintroduce national currencies?

The European Union has always been a stage where the member states have struggled for power and over conflicting interests. This is how the European Union got into its current mess. And this is why it is so difficult to predict what is going to happen in the Euro crisis next.

Unfortunately, the consequences of Europe’s economic disaster go well beyond the economic sphere. At risk is also what the European Union always claimed to have established: the framework of peaceful cooperation between Europe’s nations. It would be a tragedy beyond imagination if the Euro crisis saw a return to the political hostilities that have shaped so much of Europe’s long and bloody history.

And it would be ironic that the European Union, which was founded on the pretension of overcoming this brutal legacy, would be ultimately responsible for the revival of nationalism and radicalism across the continent.

That would be the real tragedy of Europe, and it would be far worse than the economic calamities that the continent – and the world – is experiencing at the moment.