'Why Nations Fail': Can the eurozone hang together?

Monitor managing editor Marshall Ingwerson chats with 'Why Nations Fail' co-author Daron Acemoglu.

The troubles of the eurozone today have a strong historical echo. The world has seen this situation before – in the young United States after independence but before the Constitution was enacted.

“Fundamentally, the problems are not that formidable,” says MIT economist Daron Acemoglu, author of “Why Nations Fail” with Harvard political scientist James Robinson. “But there is a Catch-22.”

That catch means that while creating a strong eurozone would be better for all players, in Dr. Acemoglu’s view, it’s unlikely to happen. Europe is unlikely to follow the US pattern anytime soon. The integration of Europe has been a tremendous success story, he argues.

“The European Union as a political project has been hugely successful. If you think of Europe in 1945, it was a wasteland. It was not only economically, politically, socially destroyed, but it was demoralized. And on top of this, you have another 65 years of complete stabilization, very rapid democratization, institution-building, very, very rapid economic growth. And I think few people would argue that this was unrelated to the stability that the European Union brought to the continent.”

But the current crisis has brought out some flaws in European integration to the surface.

“Let me take you back to the United States. The United States went through the same process with the Articles of Confederation. The thirteen [former] colonies were linked in a weak umbrella organization, but not linked politically and not linked fiscally. And that became unworkable. What the US Constitution achieved was a very rapid process of political centralization which went hand in hand with fiscal centralization, meaning that the states transferred their debt to the central government but the central government got political power over these states and that system became extremely stable, of course. And the basis of the nineteenth century growth in the United States.”

He adds: “It would seem that a similar sort of solution might be optimal for Europe as a whole.”

Many, including the US, are pushing Europe to join in a stronger fiscal union, meaning especially shared powers of borrowing. But that’s not very attractive to the Germans.

“A fiscal union without a political union means that Germany and the European institutions have no say over what budget deficits, what tax rates, what spending other countries have but are ultimately on the line for their shortfall.”

The solution needs to be both a fiscal and political centralization like the US Constitution. That would share both voice and accountability along with the money.

“But nobody in Europe – not Greece, not France, not Spain, not Italy or Portugal – would like to have more political centralization.”

Eventually, Acemoglu foresees that some countries will have to drop out of the union and set their dreams of greater prosperity aside for a time.

Further conversations with Daron Acemoglu, coauthor of “Why Nations Fail”:

Marshall Ingwerson is the Monitor managing editor.