Before you read my post, you must read this Economist article.

Are you done? Do you now understand how terrible the future looks not only for the periphery of Europe but for Germany as well? Is it clear that as we stand we are headed for the perfect storm? OK, let’s move on to what I think Europe should do to get out of the crisis, which is basically to start the United States of Europe.

Consider this: it will cost Germany and all of Europe more if there is a wide default, and if Spain and Italy leave the Eurozone. So I think it’s time for Europe to unite and risk inflation as the USA did before.

If you had to summarize the reaction of the FED to the multi-trillion default of 2008, you’ll find that the FED risked inflation and won. That the FED stood there providing unlimited credit, and so did the Treasury. And that thanks to a gigantic state intervention, the US banking system, car industry and many other industries along with the economy as a whole were saved. And there was no inflation. Europe needs to do the same now, but for that, it needs to become the United States of Europe from a regulatory point of view. The other choice is the end of Europe, massive defaults and devaluations and possibly a tremendous shock to the global economy.

How does EU become the United States of Europe?

1) Europe starts the European Treasury. An agency that regulates how all tax revenue is distributed, and can give or withhold government expenditures from EU member nations depending on revenue. Short of that, I don’t see how the EU can prevent a country like Greece from meeting its deficit targets, for example. This European Treasury has to set 5 year objectives for all European nations to go into fiscal surplus to begin paying down European debt.

2) This European Treasury needs to consolidate all European debt into one debt pool regardless of nationality to eliminate risk spreads and with a credible deficit reduction package to bring down all euro interest rates to something slightly higher than Germany’s rates today.

3) The European Central Bank needs to become the regulator of all European banks and offer deposit guarantees for all European banks to stop the massive South to North capital flight that is taking place. All European banks would subject to the same rules, regulators and bank deposit guarantees.

As I see it, the future in Europe is United we Stand, Divided we Fall.

Do countries want to lose so much sovereignty? I think given the alternative, they should. As it is, Europe is a continent in which each country is married but it can mess around. That regime won’t work. It’s either Europe or divorce. Europe needs to unify a lot more as a result of this. One European traffic control, one European army, one European anything that is managed at the Federal level in USA. The USA has found a balance between cities, states and federal that Europe needs to emulate. Otherwise, the euro will not hold.

The enemy? Local powers. But if we were able to do away with tons of people who worked at European borders, European currency agencies we can do away with local patent offices, local traffic controllers, local air forces, local armies, local 100 other things, imagine how efficient we would be. How much better off. How much better prepared to compete globally.

PS: This is a first draft, will be modifying/improving this article as I do more research and get comments.

Follow Martin Varsavsky on Twitter: twitter.com/martinvars

No Comments

George Muster on August 27, 2012  · 

Martin, your ideas as clear and reasonable, but unless there exists a United States of Europe passport and common rights they cannot be implemented.

Martin Varsavsky on August 27, 2012  · 

But that is what I am advocating. A Union as strong as the USA is a Union. Or else, divorce and death of EU as we know it. But we are stuck in between and it is taking us to financial collapse.

zaira on August 27, 2012  · 

Simplemente genial!!

christian del rosso on August 27, 2012  · 

I fully agree with your point of view, hard to implement but really needed. A good article on this topic, posted on hbr http://blogs.hbr.org/cs/2012/08/the_last_days_of_pushing_on_a.html

Grzegorz Kossakowski on August 27, 2012  · 

Martin,

When it comes to inflation in US all we know that the big money printing didn’t cause huge inflation just yet. It’s one of the biggest experiments in financial markets ever executed and we still don’t know how it will end up. Having said that, I agree with the US approach and I’m glad they made bold moves. Also, they committed to taking money out of market if there’s a threat of rising inflation. That’s a crucial piece of their strategy.

When it comes to Europe I agree but I believe we have tendency to wait until we hit the bottom (and we still haven’t) before we implement anything for real. I share your concern that once we hit the bottom it might be too late, though.

@GCWilkins on August 27, 2012  · 

In my opinion you are being utterly simplistic. Emulating US economic and legislative structure is impossible for the EU for political reasons, namely sovereignty. Europeans’ only incentives to merge to such a degree are economic, I highly doubt there are any cultural or social benefits that would overcome the feeling that comes natural to most europeans that we are, and should still be, different and independent countries.
The political crisis we are undergoing has delved in those feelings, resulting in a lost of trust to higher EU institutions so, even if there was a desire from politicians, their electorate wouldn’t approve it. At least in Spain that’s a shared feeling for a significant part of the population with both liberal and conservative values. That’s why I think it is not a question of whether there is a will to hand over such powers.

andreas cser on August 27, 2012  · 

Good analysis – ultimately everything hinges on Germany. Remember though, A Merkel was H Kohl’s political foster child. She will never destroy what her “father” built together with Mitterrand/Chirac. She is from East Germany, and she owes everything to the “European Project” (without which German unification would not have been so swiftly allowed).

She will posture to satisfy radicals back home and particularly in Bavaria, but if push comes to shove, your above points will take shape one way or another. Draghi would not have said “we will do whatever it takes” without nod from Berlin, and look at news form weekend as another proof: http://www.spiegel.de/international/europe/angela-merkel-says-aggressive-rhetoric-in-euro-crisis-must-stop-a-852269.html

Pedro on August 27, 2012  · 

Martin, what´s your opinion on starting a civil campaign promoting this ideas? We can even run surveys and consultations to make our politicians aware of the people desires, as I´m sure this future is really what a majority of europeans would like to have. Does anyone said crowdfunding? :-)

Luis on August 27, 2012  · 

Martin, there are great caveats to this approach. Let me talk about one in particular. The US is a big patriotic nation with a sense of unity, where different views exist as to what needs to be done. But in the end, all of them want the best for their nation-entity. Their politicians are a reflection of this. They work for the common good of the USA, because that’s what will get them the votes.

The EU is a mix of different well-established nations who do not have that strong sense of unity. In fact, some countries include regional politicians whose only reason to exist in life is to clinch more and more sovereignty away from their ‘evil centralist’ counterparts. And THAT is what gets them the votes.

A European citizen will always vote in favor of what is good for their nation state. And it makes sense. Labour mobility is ridiculous compared to US standards. And that is not going to change anytime soon. So, some 80-90% of them will stay within their country during life. Which means 80-90% of the political decisions they care about are those affecting their own country.

I take your point though. It is this or divorce. I guess I don’t have much faith is this marriage.

Antoin O Lachtnain on August 27, 2012  · 

I agree with the direction, but I think you overstate the requirements.

States do collect their own taxes in the US and do mostly what they like with them. This works out OK for the most part. Federalizing taxation would take authority away from member states that ‘mess around’. The problem is that you might also take away responsibility and that is the opposite of what you want to happen. Member states have to become more responsible, not less responsible. There is nothing wrong with states and municipalities having debt of their own. The problem is when the borrowing is irresponsible.

Martin Varsavsky on August 27, 2012  · 

Antoin in my plan it is the countries that do the collections. But the European Treasury would veto deficit spending.

Macarena on August 27, 2012  · 

I agree with the above-comments from Luis and @GCWilkins. I believe it is not purely an economic question. It is also a cultural and citizen awareness question. This article gathers well my point of view: http://www.forbes.com/sites/haydnshaughnessy/2012/08/17/the-euro-crisis-some-issues-for-americans-to-ponder/

George Welford on August 27, 2012  · 

To achieve a full union means transferring current state sovereignty. Apart from the economic, have you though on how to implement political union? “USE” presidential system à la Américain? Current EU Government -Presidency and Parliament- are widely regarded as powerless. How to legitimate their power?
How to achieve any person in a country to vote for a foreigner to effectively govern over them?

Martin Varsavsky on August 27, 2012  · 

Europeans gave up their currencies, their borders and a lot of fundamental things, foreigners already rule Europeans in many ways and people live with that. We are almost there but we are not there, we are married but we cheat. We have to be married or divorced and I think married is better. In USA a LOT of things are decided at the city and state level, education, culture, those can go on. Culture can remain intact, but not finance, economy. Why do I have traffic controllers from each country, as a pilot I tell you it’s a mess, a joke, some go on strike we are all screwed, and why don’t we have a common foreign policy? A common army? A common patent agency? A common FDA type agency? all these are the next moves to be competitive, either that or the biggest mess we can imagine is about to happen.

daniel foppen on August 27, 2012  · 

The United States of Europe would be the solution for many woes (not only macro-economic reasons, but also for e.g. business competitiveness, innovation, etc.), but will never happen.

The politicians that would need to take these decisions are voted for by people that do not read the Economist but dumb football papers. These people vote for the loudest populists, and with the current crisis, the populists are getting louder and dirtier with their anti-europe, anti-immigrant, anti-everything rhetoric.

The result is that the EU countries are in fact drifting apart as opposed to sticking together, moving us further and further from the U.S. of EU.

Martin Varsavsky on August 27, 2012  · 

we already did things that nobody thought possible, no borders and the euro itself, telecom derregulation and many others, we will soon face a wall and when that moment comes it will be true marriage or disastrous divorce, maybe we stop cheating and go for the real thing, you can still have a united economy, united foreign policy, united army and different cultures

i give it a 50%, the other 50% is a cliff

Christopher Wright (@ChristopherWr) on August 27, 2012  · 

Martin,

Thanks for adding some good ideas to the debate.

I welcome any ideas to help us debate a “vision and road-map” for the Euro Zone.

My big doubt is whether Germany would be prepared to embrace and risk inflation, considering its historical and cultural influences.

People remember the stories during the Weimar Republic, when people paid for a single loaf of bread with a wheel barrow full of money.

It´s a big big ask.

P. Caesens on August 27, 2012  · 

martin, that is a clear statement. Germany is indeed in a difficult situation. If they go for further unison of the European States, they would stop the convenient flow of wealth from South to North. But if they don’t, they risk far more turmoil on marketplaces than can be good for their own economy.

In the “new world”, “old world” structures should be phased out quickly to make space for the efficiency and power of a Europe-wide economy without compromises. After all, we’ve been married for a long time now. It’s about time to give the kiss.

Jordi Armengol on August 27, 2012  · 

I think the whole EU idea has as its final goal a sort of United States of Europe. For me the process is too slow. For others it is too fast. I am a Catalan independentist. You might think that the USE and wanting a new state for Catalonia are contradictory, but they aren’t and many people in Catalonia think the same way. We want to be the Massachusetts of USE. We should take advantage from the current crisis to accelerate both processes: Catalonia’ s independence and the creation of the USE. Pay attention to next September 11th for the former.

Enrico on August 27, 2012  · 

The big mistake was to create the euro currency in the first place when the conditions (political, economical and social) were not there.
What is happening now to the EU was written and easily predictable.
Now the question is: is it possible to fix it?
I don’t think so.
We are in a financial crisis that would require social and political answers, but there is no time for that.
EU is far from been a “united” entity, there are too many differences between countries and the solution can’t simply be a “financial” solution, it won’t work.
Why? Because it doesn’t make sense to apply common financial rules to country that are not really united.
EU and USA not not even close, for example in the US people can easily move from one State to another (I mean moving to live and work, not visiting!), in Europe that is not true at all. To make the EU a real United entity it will take decades, but the crisis can’t wait that long.
We don’t have a common language, we don’t have common IDs, common education titles, common anything, you can’t even bring your car from Italy to Spain without paying thousand of euros to re-register the car (I speak from my experience when I moved to Spain).
We are not united states of europe, we are very separated nations with a common currency, that’s all.
But in order to build a solid, strong common base between all the EU countries it will take years, too many years.
Forcing common financial laws in such a divided scenario won’t solve any problem, actually it will make things even worse as we have learned from the “euro lesson”.

Beside all that, Martin, your proposal is very idealistic, but very far from reality.
You propose that all countries will reach “fiscal surplus” is not doable.
Economy doesn’t work in that way, a country needs to be able to invest when needed.
For example USA and Japan will grow their public debt for the next 5 years… and all european countries should not invest?
There is a very wrong idea about the public debt.
Public debt is not an absolute parameter per se.
Public debt is just one of the many variable at play.
A country has to be able to increase the debt for years if needed, and there is just nothing wrong with that, at all.
But now in EU all the talking is about public debt… another symptom that things are out of control.
The solution? Very likely the only real solution is to go back to local currencies.

pep cruells on August 28, 2012  · 

The enemy: local powers. But it should be read: local mafias, local thieves, local bloodsuckers that don’t want to let it be. sad but true. And what about a European Citizen Initiative to start the change immediately? If WE the citizens remain silent, then we cannot blame anybody and the USE will never exist.

Enrico on August 28, 2012  · 

Also… who do you put in charge of the european “super” government?
Someone that has been democratically elected? Good luck with that!
20 countries will never be able to elect someone that will represent the interest of all.
It seems people forget history lessons like the one from Soviet Union ;)
Even if Europeans will agree on losing national sovereignty now because of the current crisis, how long will it last?
How long before local interests will come back strong to oppose it?
And at the end, why do we need a United Nations of Europe? For what?
Because without the euro currency each single nation will not be able to face the global economy?
Really? Are we sure that individual nations can’t survive? If that’s true, how come that the current crisis is hitting hard on the euro zone countries and not on the countries that are not in the euro zone?
Wasn’t the euro built in the first place to avoid that? It failed and we are still trusting those who told us that the euro was the solution?

Axel Schmiegelow on August 28, 2012  · 

Great Post, Martin.

I disagree with Enrico. Europe was built in crisis, not in homogenous steps. It takes strong political leadership now. The situation we are in stems from a lack of confidence of the markets and that comes from an unfortunate conjunction of politicians lacking the will to act upon the insights that they actually already have. I was never a supporter of Helmut Kohl but Mitterand and Kohl would have dealt differently with this crisis. The Euro was introduced with the same basic fiscal flaws that happened when Eastern Germany was integrated into the West Germany economy. German Taxpayers paid dearly for those errors. But East German integration was an unwavering political goal. It created a situation that then necessitated the reforms of the Schröder government, the Agenda 2010, which was vastly unpopular and very necessary and helped make Germany an economic powerhouse in the course of ten years. The lesson from this is that we need the same kind of unquestionable commitment to deeper European integration, so that specifically American investors understand that the Euro is no Nafta and the currency is irreversible. There is some covert interest in destroying the currency and it takes clear political commitment to reign in those forces. the best way to signal this to markets is indeed a deeper integration. That process will be less than perfect as everything has always been in the EU process, but in the end, as with Germany, it has the potential to deliver a much healthier and sustainable Eurozone, even if this takes 10-15 years as was the case in Germany. The question is: do our politicians have the intelligence and the guts to achieve this? Monti and Draghi certainly have that potential, but we need an alignment of Merkel, Hollande, and Juncker at the very least. And btw the fact that Italy in market perception is getting away with 120% GDP in debt is testimony to the fact that markets differentiate and that leadership plays a role. Crisis can be cathartic in introducing reform, and the EU needs a lot of reform.

Jacopo GIOLA on August 28, 2012  · 

Total support to your initiative, Martin !

For the sake of public visibility (and later for political support) we need now an European Figure that could sell it to all of us… Any Idea suggestion ?

Enrico on August 29, 2012  · 

Axel Schmiegelow,
your example of the Germany unification simply can’t be applied to EU situation, the two scenario are so far away that a comparison doesn’t make sense.

Adan on August 29, 2012  · 

If it all hinges on one common debt pool, Europe is bound to fail. Germany has already expressed their stance, and I don’t blame them for not wanting to bear the burden of bailing out years of irresponsible government spending. I agree, they should start with devaluing the euro to a level where they can be more competitive in the export market; there are no signs of inflation in the US after years of quantitative easing, so I doubt there will be inflation in Europe for many, many years…

Horatiu on August 30, 2012  · 

It’s beyond clear to me that a Federal Europe is the only way to go. Everything done up to this moment in what concerns EU leads up to that. There is simply no other way! How we get that federation goes i’m afraid beyond institutions, and has to deal with identity building first.

Fernando on August 30, 2012  · 

The excess of government spending has brought us to our knees…and the proposed solution is even more government?

Jose on August 31, 2012  · 

Hello Martin

When something grows it is not always more efficient. We heard those mantras “bigger is better”, “bigger brings synergies”, “bigger is more efficient” and bigger banks merged, bigger auto and telecommunication companies, bigger insurance companies.

Those companies had been failing under their own weigh, AIG, Enron, General Motors, all the big banks. Their overweight means extreme incompetence and inability to adapt to the constant evolving world, “too big to fail” and the rest of society had been forced to support those parasites again and again.

Last we heard Obama was buying time in order to make all fraudsters that led the banks to collapse elude prison.When trials begin, offenses had been prescribed(by a law Obama himself created).

I don’t want those extreme bureaucracies in Europe. If someone is a business incompetent I want her to go out of business as fast as possible. I don’t want bailouts from those that create wealth to those that destroy it.

I don’t want business and software patents in Europe because there is only one patent office and this office is lobbied by the big guys like it happened with the USPTO. I use Apple products but I’m really outraged that they could “patent” “pitch to zoom” or “elastic simulation” of a physical object just because they have money. (I was using it in my programs 10 years before them, and other people were already using it. Now someone could patent an idea that already exits “on a mobile phone”).

Today, when everybody could access computers, Internet and 3d printers, milling machines, delta robots they had to create an artificial method of creating scarcity again so only people with lots of money could compete. I know you are rich, you are one of the beneficiaries of this system.

Only one market is good, let people free. Only one big agency for everything means a big monopoly, and monopolies tend to abuse.

If Greece, Spain, Italy goes out of the Euro is not the end of the world. Hey!, maybe young people will be capable of buying a house and raising a family again.

Horatiu on August 31, 2012  · 

hy Jose

The same environment that sparked AIG, Enron or General Motors also enabled Apple, Google, Boeing or Autodesk. Failure to adapt is an internal problem, not an external one. It’s an internal process that need to developed within the organization – adaptability that is.

The EU is extremely bureaucratic as it is. Bailouts are only needed when failsafes are removed and limits ignored – as it was the case in Europe with this crisis.

The patent dilemma is real however, and at some point in time some things need to be reconsidered. In Science Fiction there are quite a few examples of overdoing it. But it falls on the legislative branch to create a good environment for businesses to thrive without it becoming restrictive. No one holds all the answers and a good deal of public consultation and negotiation is implied, especially when China is around, ignoring patents like they never existed. Some intellectual property protection is ok, but overdoing it could mean a complete and utter economic failure.

Too much freedom, and i’m saying this as a libertarian of sorts is also quite bad. Nobody wants an economic Mad Max situation.

And to finish, Greece, Spain and Italy out of the Euro would render the entire EUropean project useless. Because it would kill European optimism, sustainability and political process, as well as empower nationalistic causes.

Open to debate!

Jose on August 31, 2012  · 

Hi Horatiu

The same way that volume and weight grows with the third power of dimensions, and so an ant could survive falling 200times its height, but an elephant will die with 3, some things are more efficient when they are small. I had nothing against big business, but let them fall like you let the millions of small business fall.

They had created structures that are highly inefficient but absorb most of the wealth of the system(financial services). Failsafes had been removed on purpose because they had made a lot of people rich and they had not paid for it(free lunch). How many people paid for the abuses of the system? Asymptotically approach zero.

It was not Europe that started the “zero percent interest rates” trend, giving money to everybody with a pulse(free money), letting them bid against each other in order to raise prices, then letting them down:
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…I believe that banking institutions are more dangerous to our liberties than standing armies… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
Thomas Jefferson lived TWO hundred!! years ago when he discovered how central banking worked.

I’m not against patents, e.g it took a ton of work to make multitouch work, and predates Apple commercialization by 30 years.

I’m against software, design and business methods patents, totally unnecessary. Millions of people are going to have millions of ideas on their own. Giving exclusive property to just one person or company for something that was generated by those people is a disaster. It does not take too much to imagine “pitch to zoom”, or a “tablet”, I did when I was a child and so thousands of other people, you could see it on tv series.

China is doing what it should do, exactly what USof America did ignoring the British patent system for growing their own technology sector. British wanted colonies to extract the raw materials, But Britain reaping most the profits since manufacturing outside was forbidden. If China prospers they will enforce their own patent system on their market like the US does today.

The only problem is that the companies that are transferring the technology to China are from the US and Europe and with free money taking by western savers(negative interest rates for them).

Oscar on September 8, 2012  · 

And you are sure you’re not being sarcastic? Really? OK, here are some of the reasons for why it’s not a good idea:

* Different cultures – no sense of unity.
* Colossal and bureaucratic administration already with huge subventions of inefficient production, such as the agricultural sector already. That will only get worse.
* Huge breeding ground for even more southern europe style corruption.
* Very few voters will accept a taxation right from the EU.
* Very few people in the Nordic see the EU as something beneficial already.
* The ECBs head, super-mario, proposes to KEEP the Euro in Greece by printing even more money, when this kind of uncovered spending is what got us here in the first place!

No, that’s not the solution. The solution is actually quite opposite. What needs to happen is that the EU keeps what’s good, which is the free movement of people, money, goods etc. But the Euro needs to go, and local currencies need to re-appear. Then Greece, Italy etc won’t be able to steal other states money by blackmailing them and lying to them. Then, if your export sector is weak, your local currency will instead deflate and the market will self-regulate the system. No more artificial wealth because of the Euro and forced sponsorship from Germany, the Nordics and other more stable countries.

So, a union is only doable where language and culture are similar. And the EU is an epic fail as it is right now. Hey, if Sweden and Norway couldn’t stay in a union, why would countries in the EU manage that? Think about it. ;)

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