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.