Europe and Its Hedonistic Myopia
The European Union tends to seek quick solutions that ease immediate problems but compromise its future. It is a recurrent pattern. After World War II, and especially after 1989, Western Europe enjoyed a naïve “peace dividend,” reducing defense spending and other core state functions to extend welfare state services and promote an array of “luxury beliefs.” This complacency left it vulnerable, and Russia’s invasion of Ukraine has only highlighted that its security fully depends on the United States.
Its shortsightedness was not limited to defense. Creating the common market boosted trade and resource mobility but also brought a flood of regulations. Some have been useful, but many others, under the guise of protecting workers, consumers, or the environment, have only created parasitic bureaucracies, increased production costs, and raised entry barriers. Paradoxically, the most sensible regulations—those promoting competition and limiting state aid—are now under threat. Instead of consolidating the market, the EU risks retreating into protectionism, favoring economic and political dinosaurs.
Introducing the euro was another decision with immediate benefits but concealed a structural flaw. While it reduced transaction costs and eliminated exchange rate risk within the eurozone, it was implemented without political or fiscal union. As a result, the euro remains vulnerable. Decisions by the European Central Bank affect everyone, but its credibility depends on the solvency of just a few countries. Meanwhile, fiscal policy remains in the hands of each member state. The financial crisis showed that, without fiscal discipline, the euro could collapse. Yet, instead of preventing this risk, the EU worsens it every time it mutualizes debt and relaxes fiscal criteria.
Faced with any challenge, the EU persists in painless solutions. In finance, it seeks deeper integration of capital markets to facilitate investment and credit access. Granted, enlarging and integrating capital markets is desirable, but even if this approach were as beneficial as its proponents—perhaps exaggeratedly—claim, this painless strategy only postpones decline. At best, it buys time but merely disguises our structural weaknesses.
Even more so if the EU opts to further increase the weight of public bureaucracies on the economy. The latest justification for this recurrence is Europe’s abundant savings invested abroad, ignoring that capital should ideally flow to wherever returns are highest, and currently, that place is not Europe.
Instead of genuinely improving the economic environment, the EU feigns commitment to deregulation (for example, by barely reducing the absurd requirements of the sustainability directive), completely ignores the need to lower tax costs (notably absent from Draghi’s report), and prioritizes state control over credit allocation. Besides renaming failed industrial policies, the EU seeks to recreate privileged financing circuits that, rather than strengthening the economy, perpetuate ruinous investments. The paradigm here is entrusting public sectors—already proven incompetent and corrupt in such tasks—to foster venture capital and innovation.
Another challenge the EU attempts to address painlessly is the increase in defense spending, intended to be financed by joint debt issuance. As with the post-pandemic recovery funds, debt mutualization generates perverse incentives. If some countries perceive they can spend without fully bearing the costs, deficits and fiscal irresponsibility will persist. Meanwhile, governments in countries with voters prone to shortsightedness and complacency, like Spain, will continue clinging to power through mass vote-buying.
It is also unrealistic to expect this European debt to be “self-extinguishing,” given most member states aim to indefinitely refinance their public debt. All this occurs against the backdrop of Germany relaxing its constitutional debt brake, raising borrowing costs across the EU, while the German economy and society show alarming signs of exhaustion. If Wolfgang Münchau’s diagnosis in Kaput: The End of the German Miracle proves accurate, revealing Germany’s weakness, Europe—including the euro—will face growing difficulties.
The underlying issue is that the EU continues searching for shortcuts instead of addressing its fundamental problems. Expanding markets or inventing financial instruments is not enough if we keep betting on an exhausted model. Europe needs an economic environment attractive by itself, independent of painless magical thinking. Long-term security cannot be bought with more debt unless accompanied by solid, sustainable growth. Competitiveness isn’t achieved through occasional synergies or subsidies but low taxes, clear regulations, and stable frameworks favoring investment. Financial stability is guaranteed not by issuing “safe” debt but through responsible fiscal policy.
Europe remains stuck in a loop of easy, mostly false solutions that, at best, only delay decline. This short-sighted strategy of masking problems with quick fixes has run its course. For Europe to be reborn, it urgently needs to reduce the overall size of the state, removing paralyzing excesses and strengthening functions only the state can fulfill—functions we have irresponsibly neglected for decades.
English version prepared with ChatGPT-4.0