Euro Pinioned

   The European Union is caught between the proverbial rock and a hard place, and unless one side yields -- even a fraction -- the pressure will crush the euro and perhaps even cause the entire multi-nation federation to crumble.
   In a way, Europe has been trying to do what America did more than 200 years ago -- form a union of independent states, in the process dismantling tariff and passport restrictions and allowing the free movement of goods as well as people across national boundaries, using a single monetary unit to encourage cross-border trade.
   But as some of the nation-states suffer economically and the stronger ones remain reluctant to help bolster the finances of the weaker, the euro may collapse -- or at least lose its effectiveness as a single currency for the 27 nations of the EU. Ideally, the EU would function much like the U.S., with a centralized government coordinating rescue efforts when one of the states encounters budgetary problems.
   It would be as if the U.S. federal government in Washington refused to lend a fiscal hand to Florida or Louisiana if one of these states faced bankruptcy. And if the euro collapses or if one or more member nation-states drops out of the union, the financial and economic tremors would reverberate worldwide.
   However, while the EU does have a central bank to control the number of euros in circulation, it does not have a central treasury to shore up troubled bond issues of member nations. This leaves the member states in the position of issuing euro-based bonds on their own individual faith and credit, but without the support of the stronger nation-states.
   Unlike the U.S., the EU has no effective central government, and remains a confederacy of independent nation-states. And just as the American states realized the need for a coordinated monetary system and a stronger centralized government to supervise it -- only the federal government can issue money -- so the EU needs a stronger agency to provide assistance to a member state in financial distress.
   For example, the economy in Greece is in danger of collapse, while that in Germany remains strong and growing. Meanwhile, Spain and Italy are also suffering economically. But these countries, as well as the other 23 nations of the EU, all use the same monetary unit, the euro. And while government bonds sold by Germany are a good investment, those sold by some other countries are not.
   In the past, each country could change its monetary policy to patch up its troubles, even to the most drastic measure of devaluing its currency. But with a single currency -- the euro -- they cannot. And without a central treasury to buy up the bonds of troubled members regardless of risk, government bonds will not be sold, the nation-states that issue them will be unable to raise funds, and the governments of those nation-state will go bankrupt and collapse.
   The international financier George Soros, writing in the New York Review of Books (Sept. 27, 2012), warns that unless Germany takes a lead in helping to settle budget accounts, a severe depression looms for Europe as a whole. Since Germany is the healthiest nation-state in economic terms, Soros writes, officials in Bonn should lead efforts to rescue the euro. Failure to do so, he adds, threatens the existence of the entire European Union.
   Yet Germany is reluctant to act. Why? It may be for historical reasons. Many Germans may not want to be perceived as planning a new attempt at political domination of all Europe, a fear likely shared by many others throughout the EU.
   But the reality is that Germany today is the dominant economic power in Europe, and that power can be used in friendship for the political survival of the entire union.
   The question is, will it.