(Reuters) - When the 2012 Nobel Peace Prize was awarded to the European Union, jaws dropped from Belfast to Belgrade. The citation said the EU had helped transform Europe "from a continent of war to a continent of peace," and that its "most important result" was "the successful struggle for peace and reconciliation and for democracy and human rights." Many think that is a strange way of interpreting the last 100 years, given that the maintenance of a free Europe since the end of World War Two is due more to the thankless diligence of NATO and the unsung generosity of the United States.
The timing of the award was also puzzling. The very existence of the European Union is under severe threat as it struggles to maintain its common currency, the euro. To protect the euro, EU bureaucrats in Brussels and political leaders in Berlin and Paris have made the poorer member nations the target of austerity measures that threaten to undermine those nation's democracies. Instead of celebrating the EU as a benign force for peace and trans-national cohesion, the Nobel Committee might just as easily have condemned it for using the global financial crisis as a pretext to double down on its grand plan to forge a single European state. The award by the notionally apolitical Nobel Committee — whose host country, Norway, chose in 1972 and again in 1994 not to join the EU — appeared to be a desperately needed vote of confidence for an ambitious dream that has turned into a divisive nightmare.
Neither awards nor plaudits will save the European Union. Central bankers alone won't fix it, either. That's because a lasting remedy for what's ailing the region must be political as well as financial. The modern history of Europe largely revolves around the bitterly fought and seemingly eternal contest between France and Germany, with Europe's third great power, Britain, sometimes wisely and often mischievously maintaining the balance. Both of the 20th century's ruinous world wars and several other destructive conflicts stemmed from Franco-Prussian enmity. It was primarily to bring this perennial conflict to an end that the EU founders — French diplomat Jean Monnet, French statesman Robert Schuman and the Belgian premier Paul-Henri Spaak — envisioned a Europe in which the nations were bound ever closer by an economic pact. The other unstated aim was to create a single European state to rival the United States in population and wealth, and, as time went on, to compete with the burgeoning economies of India, China, Russia and Brazil.
A huge leap toward those goals was made in 1999 with the establishment of a single currency, the euro, that replaced the national currencies in 17 of the EU's 27 states. To speed up the euro's birth, almost every EU nation — countries with fragile economies, such as Greece and Ireland, as well as rich nations like Germany, France and the Netherlands — flagrantly bent the rules of entry. The hurried shift from sovereign nations controlling their own currencies, interest rates and fiscal policies to a common-currency coalition with a uniform monetary policy determined by a central bureaucracy was pushed through with minimal public debate. Europe's governing elite deemed this alliance so self-evidently beneficial that the end justified the means, but the wishful thinking behind the hasty creation of their single currency is now evident as the euro unravels.
The central — and perhaps fatal — flaw of the euro is that it is a common currency without a common fiscal policy. The world financial crisis of 2008-09 exposed a number of frauds, among them Bernie Madoff's gigantic Ponzi scheme. Another revelation was the core defect in the design of the euro. Some anti-American Europeans, including Thorbjorn Jagland, chairman of the Nobel Committee, take cold comfort from the fact that an economic meltdown rooted in the United States exposed the euro's inherent instability, but it is little solace to the Greeks, the Spanish, the Portuguese and the Irish that the tight fiscal conditions and long-term misery they face might have been avoided had that meltdown not taken place. Had those countries rejected the euro, they could have devalued their currencies to weather the financial storm. As it is, they face a Hobson's choice: to stay in the euro zone or leave and be driven into bankruptcy and destitution.
Instead of humbly admitting that mistakes were made, European leaders have bet everything on a headlong drive toward a single state. They are speeding up the unification process, with disastrous consequences: The debtor nations must send their best people abroad to find work and impoverish those left behind. The folly of pushing this political union without first convincing their populations of its merits is increasingly evident in the rise of opposition parties. Anti-European sentiment binds the poisonous creeds of extremists that threaten the very peace the EU was intended to guarantee. British Deputy Prime Minister Nick Clegg, who is pro-EU, warned in May 2012: "Opinion polls across the EU — in the Netherlands and in the south <of Europe> — are showing a growing disenchantment with the EU as a whole. … If the euro zone doesn't come up with a comprehensive vision of its own future, you'll have a whole range of nationalist, xenophobic and extreme movements increasing across the European Union."
We've seen this before. In 1919, having witnessed firsthand the vindictiveness of the Paris peace talks at the end of World War One, John Maynard Keynes wrote in The Economic Consequences of the Peace that the punitive reparations imposed on Germany and Austria in the Treaty of Versailles were so severe that widespread poverty would inexorably lead to the rise of extremist politics and a second world war. Twenty years later, Nazism had brushed aside the democratic Weimar Republic, and the world was at war again.
Now, ironically, it is Germany imposing savage economic retrenchment on its neighbors. Citizens of the poorer European nations have been given no option but to pay off their debts, endure austerity for the foreseeable future, or be expelled from the euro zone. Half of young Spaniards under 25 are jobless, and even the most optimistic EU estimates suggest austerity will continue in the southern nations for at least a decade. For younger Europeans, that means leaving their country of birth to find jobs in Germany, Britain, or the Benelux countries, or staying home and unemployed. For those at or near retirement it means returning to work, if they can, to supplement their devalued pensions. There is no easy alternative to this punitive regime.
Pushing austerity rather than policies for growth has spurred an alarming rise in populist extremist parties, the clamor for the dissolution of established national borders, the resurgence of regional nationalism in Scotland, Catalonia and elsewhere, and the widespread resurgence of xenophobia and racial intolerance. There is now severe poverty in Europe on a scale not seen since immediately after World War Two. Women in Athens sift through refuse, searching for food. Child prostitution is rife in Naples. General strikes and violent demonstrations against austerity have become regular occurrences across Greece and Spain. Greeks have lost a third of their earning power in the last five years and their prime minister, Antonis Samaras, warns that the social cohesion of his country is "endangered by rising unemployment, just as it was toward the end of the Weimar Republic in Germany."
The old national stereotypes are quickly re-emerging. "We're back to calling the Greeks lazy, the Italians shady, the British disconnected, and the Germans bent on domination," says Richard Whitman, professor of politics at Kent University, England. This intolerance feeds on itself and conjures the specter of the racial cleansings that ravaged Europe in the past. "As ethnic identities return, ethnic differences become more pronounced," says Yale political science professor Nicholas Sambanis, "and all sides fall back on stereotypes and stigmatization of the adversary through language or actions intended to dehumanize, thereby justifying hostile actions."
All this anguish might be worth it if the economics behind it made sense, but attacking insolvency with austerity is self-defeating. In countries as disparate as Greece and Britain, more burdensome taxation and reduced public services — ostensibly to pay down debt — have resulted in a return to recession and increased national borrowing.
Nor does trying to appease the money market work. As fiscally continent Northern European nations enjoy reduced inflation, prices are soaring for southern nations. Instead of rewarding fiscal moderation, giant European investment funds like Finland's Varma, which manages $44 billion in assets, are shunning government bonds issued by "problem countries" like Spain and Italy. "There is so much political risk," says Risto Murto, Varma's chief investment officer.
The crisis has also trampled democracy. In Spain and France, governing parties of both the left and right have been voted out, but their replacements quickly adopted policies identical to those of their predecessors. This is creating widespread disenchantment with the democratic process. Even more troubling, democratically elected politicians are being pushed out in favor of more pliant technocrats. Mario Monti, a former EU official who held no elected post, was parachuted in to lead Italy out of its financial mire at the behest of Brussels. What Yale historian Timothy Snyder has described as "pantomime republics" make a mockery of the Nobel Committee's admiration for the EU's "successful struggle … for democracy and human rights."
There is a way out — if Europe's leaders can persuade Europeans that a united state is not only desirable but essential in an increasingly competitive world. If the EU is to succeed, the people must be offered clear democratic choices about Europe's future. If not, the EU will fall apart. For Germany to dictate terms to the rest of the euro zone and install a single fiscal regime with a single annual budget across all European nations designed and applied in a central treasury and policed by an unelected "super-commissioner" seems intolerable and may be untenable. It may also be that Germany, fearful of inflation and driven by its reliance upon exports, has too strong an economy to be shackled to the rest of the EU. As George Soros bluntly put it, "Germany should either lead or leave."
The pressure is on German Chancellor Angela Merkel to lead Europe out of this morass. She must see that her goal of a single European state is imperiled by an economic chasm that divides Europe into north and south. The way out of the euro-crisis is not to demand more austerity and closer unity but to allow Europe to grow its way out of trouble.
Merkel is an intensely practical woman who embraces the no-nonsense approach to big ideas of her predecessor Helmut Schmidt, who once said, "Those who have a vision should see a doctor." Growing up in East Germany, she learned to keep her thoughts to herself, but now is the time to think big and talk big. First she would need to have a serious talk with her constituents, who have prospered mightily thanks to the euro. German exports were expensive when priced in deutschmarks and are now a bargain in euros. As the rest of Europe slid into recession, Germany's economy continued to grow, and young Germans, unhampered by their parents' and grandparents' war guilt, have grown tired of picking up the tab for the rest of Europe.
Merkel would have to convince those adoring voters that the biggest threat to their affluence is not hyper-inflation, as it was for the Weimar generation, but deflation, long-term joblessness, chronic poverty in the rest of Europe, and the ancient grievances those conditions feed. Then she could deliver a bold, defining speech that would explain how all parts of the continent will benefit from a strong EU, while offering compassion to those caught in an economic bind and an optimistic endgame to these hard times. There is no mood for the type of generous government spending that cured the Great Depression and lifted Western Europeans to their feet in 1945 through the Marshall Plan, but Merkel could offer prosperity through growth so that all Europeans would feel they had a stake in the EU. She should reassure all the peoples of Europe that they can better weather the current economic storms and fierce market challenges ahead by sticking together.
Merkel might even indulge in a little stargazing and affirm the commitment of Europe's leaders not merely to a united state but to a united people. She should pledge that the EU will be a democratic, transparent, benign, well-ordered, peaceful society in which national and regional aspirations are guaranteed and individual rights protected.
Herman Hesse once wrote, "It is not our purpose to become each other; it is to recognize each other, to learn to see the other, and honor him for what he is." If Merkel could hit that note, the whole of Europe would owe her their loyalty and gratitude.
(Nicholas Wapshott is the author of Keynes Hayek: The Clash That Defined Modern Economics, published by W. W. Norton. Nicholas. Any opinions expressed are his own.)
Editing by Jonathan Oatis and Prudence Crowther