Markets are reeling because Europe's leaders have only offered up half-measures to resolve the crisis. Not until Brussels, Paris, and Berlin realize the fundamental flaw in their current approach -- a lack of real political and economic integration across the eurozone -- will there be an end in sight.
Jean Monnet's dream that European integration would eliminate conflict may have been a delusion. France and other countries do not share Germany's fixation on sound money -- or its hegemonic vision. A European central bank would be unresponsive to local unemployment, while political union would remove competitive pressures within Europe for structural reform, prompting protectionism and conflict with the United States. A Europe of 300 million people and an independent military might be a force for world peace, but war is also a distinct possibility.
Two years, three sovereign bailouts, more than a trillion euros in cheap ECB loans, and dozens of summits later, the latest developments in Germany suggest that Berlin is moving to solve the continent's crisis. But the country’s idea of a solution remains a system in which Berlin gets de facto and de jure veto power over national budgets in return for eurobonds. That misses the point: the crisis is not fiscal, but financial. It began, and it will end, with the banks.
"Never did a ship founder with a captain and a crew more ignorant of the reasons for its misfortune or more impotent to do anything about it." This was Eric Hobsbawm's damning judgment of the policy elite's response to the Great Depression. As these leaders reached for the old truisms of balancing budgets, lowering tariffs, and restoring the gold standard, they merely worsened the crisis. The same judgment may soon be passed on Germany for its role in the ongoing European sovereign debt saga.
After watching the economies of Greece, Ireland, and Portugal founder, the world has now turned its attention to Italy, home to the world's eighth-largest national economy and third-largest sovereign bond market. The diagnosis is sadly redolent: Europe should deflate its way to growth by sticking with a gold standard of sorts: the hard-money German-dominated euro. Meanwhile, under enormous international pressure, the Greeks replaced socialist Prime Minister George Papandreou with Lucas Papademos, a former official of the European Central Bank, and the Italians placed economist and former European Commissioner Mario Monti, hailed "super Mario," in the stead of Silvio Berlusconi. Yet despite the EU's coup d'état, the yield on ten year Italian debt went back above seven percent within twenty-four hours of Monti showing up for work.
It is more than ironic that those two foundational Western civilizations -- the Greeks and the Romans -- who were among the very first to experiment with democracy, now have to let unelected Eurocrats run their economic affairs. There is even a whiff of the 1930s here, too, as weak democrats are pushed aside in favor of strong leaders at the behest of international creditors. As Hobsbawm noted, this did not end well last time...