The Euro crisis seen through 3 historical models

Helmut Schmidt.jpg

When Helmut Schmidt invites you to give an “Impulsreferat” (an impulsive talk to spark discussion) you 1) accept, 2) feel honored, 3) get intimidated, and then 4) do your best to be insightful in a provocative way. After all, the former chancellor, about to celebrate his 95th birthday, not only made a good chunk of history but remains one of Germany’s top intellectuals.

The other day I was indeed invited to speak before him and a distinguished group of his Nationalstiftung, a sort of think tank. The topic was “Germany’s role in Europe.”

In the debate which followed I inhaled a great deal of wisdom and an even greater amount of second-hand smoke (because Mr Schmidt, directly across from me in the picture above, was smoking throughout, as is his wont). I cannot tell you who said what, but I can tell you how I decided to get that debate going.

Three historical models

We could analyse the euro crisis and the entire European Union today through three historical precedents which each would imply a possible solution.

Using the formula “Model | Precedent | Solution”:

  1. Leadership/hegemony | Pax Britannica or Pax Americana | Pax Germanica
  2. Deep integration | Alexander Hamilton’s Federalism in America | United States of Europe
  3. Loose integration without hegemony | Holy Roman Empire | Muddling through

1) Pax Germanica

In the 19th century, Britain preserved the international system (of free trade, the gold standard, et cetera) by being that system’s hegemon. This era is called the Pax Britannica (“British peace” in Latin, harking back to the Pax Romana.)

When Britain became too weak to continue as hegemon after World War I, and America was not yet willing to take over as hegemon, the system fell apart into chaos.

Order was restored only once America became willing, after World War II and with the onset of the Cold War, to step in as hegemon. This is (was?) the Pax Americana.

What is a hegemon? Charles Kindleberger in his class book The World in Depression, 1929-1939 provided the definition. In a nutshell, it is a great power which decides to lead by putting the interests of the system above its own short-term interests in order to preserve that system, for example by being a so-called lender of last resort.

When people suggest that Germany ought to become more of a leader in the euro zone today (as we at The Economist do suggest, but this blog contains — as always! — my personal and open-ended ruminations) they have in mind a regional Pax Germanica, in which Germany in effect becomes the lender of last resort.

I see four reasons why a Pax Germanica cannot become a permanent solution:

  1. For obvious historical and psychological reasons, the Germans do not want to become a leader (the German word is Führer) of anything again.
  2. Whereas Germany’s business elite has a globalist and cosmopolitan outlook, Germany’s political elite is astonishingly provincial.
  3. People in neighboring countries, even those who currently claim to want Germany to be a leader, would not actually be happy if it did become leader.
  4. Above all, the system to be preserved — the EU — was designed specifically so that no single member country could become a hegemon ever again.

That last point needs elaboration, which I sort of provided in this essay on “the German Question”. Thomas Mann once expressed this as the question of whether Europe is to be German or Germany is to be European.

When Germany, France, the Benelux countries and Italy got together in the 1950s to start the European project, their motivations were the following:

  • Germany wanted to atone and be readmitted into a Western and civilized community of nations, explicitly offering to cede political power even as it regained economic power.
  • France wanted to keep projecting influence even as it was losing its power (and empire), especially vis-a-vis America, by accepting Germany’s offer of playing second fiddle in politics to France’s first fiddle.
  • The Benelux, like other small countries who joined later, wanted to gain a modicum of power simply by being part of a system in which nobody else dominated.
  • Italy wanted to outsource its governance to the north.

The structure that became the EU, now with 28 members, was therefore built so that no member can dominate the others. That’s why all the institutions of the EU, from the Council of Ministers to the ECB, have such complicated voting rules and why, for example, tiny Malta has the same number of votes (one) as does huge Germany on the ECB board.

There was no such system, one intentionally designed to prevent hegemony, during the Pax Britannica and Pax Americana. (The United Nations and Bretton Woods were sort of meant to be similar, but clearly were not.)

Pax Germanica therefore is simply not available.

More importantly, attempting a Pax Germanica would entail risks, as Dominik Geppert at the University of Bonn describes in a new book. (I am actually paraphrasing his views from a preparatory essay he wrote:) It would at most result in a “semi-hegemony,” in which Germany would be held responsible for maintaining the system but would not have the means of maintaining it.

This would turn the EU into a tension system. But the EU was conceived as the opposite: a peace project. If hegemony were forced onto a system meant to be non-hegemonic, Greeks might one day again hate Germans (some already do), and that’s what Germans are most afraid of.

2) United States of Europe (Hamiltonian EU)

Confronting a different but not irrelevant crisis in America, Alexander Hamilton in the 1780s conceived a vision in which a relatively loose group of 13 states were to pass their sovereignty to a new federal center.

In so doing, that new central government would take on the debts of the member states and repay them out of a new federal treasury with new federal tax revenues.

Because this constitution proved successful, the Swiss later imported it almost wholesale as the basis for their federal system, so there are at least two models out there.

Applied to the EU, it would mean:

  • EU taxes
  • an EU Treasury
  • EU bonds
  • an EU White House (the Commission), an EU Congress (the EP), et cetera.

Notice, however, that these EU bonds would have nothing to do with the “eurobonds” that are being discussed. Those eurobonds would instead be bonds issued (in the analogy) by California but guaranteed by Texas and the other 49 states jointly. Neither America nor Switzerland has, or could have, such an arrangement. Eurobonds (where Germany in effect vouches for Greece) in fact belong properly into the Pax Germanica model, not into the Hamiltonian model.

Notice that even Hamilton was not able to resolve all major questions, above all the issue of slavery, which he abhorred but had to tolerate in one group of member states. In the EU today, there are no open questions on that scale, but nonetheless very different views about how, for instance, states and markets should interact. America eventually had to fight a civil war to resolve its open question; the EU, remember, is above all a peace project.

That aside, is this model even feasible? My guess is that Germany has more people than any other large member country who would even contemplate ceding sovereignty to Europe. (I am thinking of the old guard of Helmut Kohl and Wolfgang Schäuble.) But they would still be in the minority. Elsewhere, above all in France (not to mention non-euro countries like Britain), you would be laughed out of the room for even asking.

So whereas we can all keep busy planning more shallow integration (that’s basically what the fuss about “banking union” amounts to), deep integration is also not available.

3) Muddling through | Holy Roman Empire

Quite a few historians have of late noticed the remarkable similarities in structure between the late Holy Roman Empire and today’s European Union. I devoted an entire Christmas Special to this comparison last year. Even in Hamilton’s time the Holy Roman Empire was seen as a possible alternative model for a federation in America: Thomas Jefferson, later Hamilton’s archrival, even traveled through the Holy Roman Empire taking notes to explore that option.

It does not matter that the constituent parts of the Empire were not democratic, as the EU’s member countries are. What matters is the way those parts share sovereignty with their union and express that in common institutions.

In a nutshell, the Holy Roman Empire after the Thirty Years War agreed to leave the question of sovereignty and integration ambiguous. Thus its laws were signed by “Kaiser und Reich”, emperor and empire, where empire meant the princes. In much the same way, the German and EU flags today fly side by side on top of parliament.

The struggle between closer union or looser union was thus resolved in favor of a looser union, rather as Britain imagines the ideal EU today. As Hamilton’s America had slavery, the Empire had the Catholic-Protestant conflict, but it defused this through loosening of the union (“subsidiarity” in the language of today’s EU). The Holy Roman Empire would never again fight about religion. (Arguably, the Catholic/Orthodox-Protestant split continues in the EU and euro zone to this day.)

Even the process and style of bureaucracy was similar: Germans today have the phrase “etwas auf die lange Bank schieben” (to shove something onto the long bench) to mean endless delays in Brussels or elsewhere. The phrase originated at the imperial diet in Regensburg, where delegates literally shoved their paperwork onto a long bench which still exists in the city hall today. (Several German Eurocrats have remarked to me that Germans, with their millennium of experience with federalism, tolerate the processes of Brussels more readily than the French or British do, with their history of centralism.)

How did the Holy Roman Empire fare in its final 160 years?

  • Its citizens were comparatively prosperous and free.
  • It constantly had problems with currencies and princes’s debts, as we do today. It kept finding new solutions, including regional currency unions (the Taler zone in the north and the Gulden zone in the south) with accompanying institutions, such as the Kreistage, which resemble our Eurogroup.

Things started going bad when two of its members, Austria and Prussia, began openly competing with each other for pre-eminence, even going to war. This was a failure of the system, which, after all, was designed to prevent a Pax Austria or a Pax Borussia and to preserve a non-hegemonic system. So there is a question about whether such systems can remain non-hegemonic indefinitely.

Weakened by that rivalry, the Empire finally proved no match for Napoleon and expired. The EU could of course face such an external threat one day (Russia?). But until then, it may just have to muddle through the way the Holy Roman Empire did during its final 158 years. That option would not be intellectually clean and satisfying. But unlike the alternatives, it might just be available.

(One more reminder: This is a personal and tongue-in-cheek thought experiment and in now way represents the editorial opinion of my employer.)