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Foreign Policy Analysis
European Integration | Model Diplomacy

European Integration | Model Diplomacy

The European Union has 28 member countries, a bit more than 500 million people, and it’s a massive diverse range of different countries. The euro is the common currency used, not by all 28 European Union countries, but by a club of 19 that signed up for it. It came into being really in 2002, when they phased out the old currencies and coins that had been in people’s pockets until then. The European countries began to integrate in the 1950s, when they came up with the idea of the coal and steel union. If they had joint management of those key industries, you couldn’t have one country building up a huge defense complex to attack the other one without the other one realizing it. In the beginning, in the 1950s, it was about security and peace. It was about building relationships and integrating a continent that had been riven by war twice in half a century. And then it became a common market for trade. With peace has come a decent measure of prosperity. If you can trade across borders, people can specialize more in what they’re good at, and that generally increases productivity. If you can invest and believe that your factory will sell to more consumers, you can reap economies of scale. And then very importantly people can move around. You can be a student from Greece and go study in Germany. You can be an electrician from Poland and go work in London. You can be a chef from France, go work in Holland. The central achievement of the European Union has been to bind the countries together in a way that really makes war unimaginable. European integration has to a large extent succeeded. Where it’s perhaps been guilty of some overreach is in currency integration. Currency integration presupposes that economies are going to be managed in a similar way. If you suddenly get one country which starts to run big budget deficits to boost growth, or starts to permit wages to be bid up too fast, that country will find itself uncompetitive with the more disciplined members of the common currency. In 2010, Greece found itself unable to export almost anything to its partners in the European Union because it allowed wages to go up too much. And the same was true in other countries: Spain, Italy, Portugal. And because they couldn’t export and they were therefore unable to earn enough revenue to pay for their imports, they were borrowing money from the rich countries at the center, like Germany and Holland. And that was a pattern that was possible to sustain for a decade or so, but at a certain point the creditors in the rich countries grew fed up with lending and not being sure they were going to be paid back. That’s really what explains the rolling crisis that began in late 2010 in Greece and spread thereafter through the periphery of Europe. Aside from dealing with its currency tensions, the European Union needs to think about its labor markets. In some of continental Europe–I’m thinking particularly of Spain, Italy, and France–there is an extraordinary amount of regulation around how you hire people, what are the circumstances on which you might possibly decide that you don’t need them anymore. And if you can’t fire people you won’t hire them in the first place. Labor market deregulation is an ongoing challenge; it’s politically extremely sensitive and difficult to make progress with. But it is something that has to be tackled. Germany provides a template. Around 2000, Germany was known as the “sick man of Europe.” And then it embarked on a program of microeconomic reform: freeing up labor markets, freeing up investment rules. And this caused an absolute boom in manufacturing success. Stronger growth in Europe would be great for the U.S. because you’d have more exports to Europe. But then there’s also a geopolitical reason for the United States to care, which is, during the Cold War, a very strong tradition of cooperation on foreign policy was built up, and Europe remains perhaps the most effective set of allies for not only military challenges but also things like climate change or dealing with anything from cybersecurity threats to Ebola. And therefore having a prosperous and strong Europe makes Europe into a better partner for the U.S.

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