Financial Times columnist Wolfgang Münchau points a finger squarely at chancellor Angela Merkel in his article High Price of Europe’s Misguided Pragmatism.

As is typically the case, Münchau gets some things right while missing the big picture.

As for solutions, Münchau is nearly always wrong.

Sustainability is what this is all about. This is the main lesson from the Brexit vote. Britain will leave the EU not because David Cameron , the former prime minister, made a tactical error. He did, of course. But UK membership is ending because it was unsustainable. The EU has always been a project of political integration. The Remain campaign was premised on the notion that this was not so.

For the EU you can define a sustainable solution as the opposite of a pragmatic one. Sustainable solutions are task-oriented; pragmatic ones are often short-sighted. The German refusal in 2008 to recapitalise the European banking system seemed pragmatic at the time. Chancellor Angela Merkel goaded the other leaders into the decision that every country rescues its own banking system. Eight years later, the Italian banking system is still insolvent and awaiting an urgent recapitalisation. We are still debating what toxic assets may be hidden in the balance sheet of Deutsche Bank. Ms Merkel’s decision was the start of the eurozone crisis.

Or take the equally pragmatic decision in 2010 not to allow a writedown of Greek sovereign debt because German and French banks would otherwise have incurred unpleasant losses. The halfhearted programmes for Greece led to another crisis in 2012 and again in 2015. The latest news from Greece is that the recession is accelerating again.

Britain’s opt-outs are perhaps the most fateful example of misguided pragmatism. The opt-out from the single currency and the Schengen passport-free travel zone sounded sensible when agreed; they allowed a Conservative government to overcome its internal divisions for a short period. But they did not fix the underlying problem of a country deeply divided over its engagement in Europe.

The monetary union is the most important part of the EU, especially now the UK is leaving. The eurozone will require a higher degree of political and market integration. The eurozone, not the EU, is the only geographical unit for which a single market makes sense, especially in financial services. The eurozone also requires further market integration, most importantly in labour. It needs free movement as a macroeconomic stabiliser — with people moving from countries with high unemployment to those with a shortage of labour; EU countries not in the eurozone can happily live with less integration.

Sustainable Solution

Münchau concludes with the idea the “sustainable solution thus consists of a more integrated eurozone and a less integrated EU.”

As is typical, Münchau fails to get at the heart of the matter.

Impossible is Not Sustainable

Merkel Failure2

Münchau hit at Merkel because she did not allow a eurozone banking bailout and repeatedly failed to do anything to help Greece.

He conveniently fails to point out the German constitution has already been distorted out of shape to do as much as it already has.

Münchau also fails to note the makeup of the euro itself is fundamentally flawed.

The “pragmatic” problems to which he refers are simply a guaranteed outcome of those flaws. And at this point there is virtually nothing that can be done to fix them.

Rise of the Eurosceptics and Anti-Immigration Forces

Brexit was not a pragmatic decision, but a common sense, sustainable one. Curiously, the second paragraph in Münchau’s article is as follows:

“Virtually all my continental European friends saw that UK membership of the EU was unsustainable. How is it possible, they asked, to refuse to be part of the eurozone and the banking union, but also be a full member of the single market for financial services?”

What part of his own paragraph does Münchau fail to understand?

Voters Sick of More EU/EMU integration

Voters are clearly sick of more integration, for good reason.

The Euro was supposed to lift all boats. Italy was left behind, and will stay there for two more decades according to the IMF.

Italy GDP Since Joining Eurozone

Italy GDP 2016-07B

The main beneficiary of the Eurozone was Germany.

For discussion, please see Italy’s Miserable Eurozone Experience: 20 More Years of Woe Coming.

It is ridiculous to propose “solutions” that cannot work politically and are fundamentally flawed from the start.

Mike “Mish” Shedlock