Europe Knows What It Needs to Do

At a small, turn-of-the-century dinner party in Washington, arranged for a high EU official by the U.K. ambassador to the U.S., the official asked what the assembled experts thought would be the future role of Europe in world affairs. A colleague of mine responded, "Europe is irrelevant to the 21st century."

The heated denials that followed were not credible then, and are less so now. The good news for the future of the Europe Union is that its leaders now know that, and know what they have to do.

The bad news is that knowing what has to be done is quite a different matter from actually doing it.

The best and most obvious example is Greece. Policy makers know that eventually they will have to allow Greece to restructure its debt, but insist they won't. But that is only today's problem, and a trivial one compared with the more fundamental issues that threaten Europe's future relevance.

Europe's refusal to bear the burdens of maintaining a sensible world order has diminished its influence around the world. Ask anyone in the White House to name the three European Union presidents, and most will have trouble naming one. Why bother communing with an area the size of America that won't spend enough on its military to police its own backyard, or make a meaningful contribution to the war on terror — Britain being the notable exception.

The spectacle of the president of the EU's largest country being forced to resign for suggesting that the deployment of German troops to Afghanistan, most of whom are kept at a great distance from any fighting, is a proper defense of the nation's self-interest tells a great deal about the reliability of Europe as an ally. Absent some great moral purpose, Europe won't fight, and given a great moral purpose such as stopping Serbian genocide its financially starved military doesn't have the resources with which to fight.

At the time of the Washington dinner it was possible to deny the fact that a monetary union that does not include some central control of fiscal policy is not sustainable.

No longer. Wild deficit spending by Club Med countries has produced perhaps fatal strains on the euro. Consider these facts: the world's central banks are reluctant to add to their piles of euros, rating agencies are increasingly skeptical of the quality of sovereign euro-zone debt, investors are hesitant to make funds available to European banks at anything like historic interest rates, and German voters are tired of being the EU's ATM machine.

The question now is what is to be done that both ensures the survival of the euro and is also politically feasible. On one thing the eurocracy agrees: it must not trigger an amendment to the Lisbon Treaty, lest voters be given another chance to let their masters know just what they think of the European Project, and torpedo it. Less kindly put, fight fiscal deficits but maintain the EU's democratic deficit at all costs.

Europe's leaders believe they can do what needs to be done without a treaty revision. Top of their list is to convert Europe's sclerotic economy into a dynamic one. It is now obvious that annual growth of 1% just won't do, especially in a period of austerity. All save the unreconciled Left agree that labor-market reform is crucial. Even Spain and Greece are taking the first baby steps in that direction by making firing easier and less costly so that employers will be more willing to take on new staff.

Not far behind must be other items on a growth agenda. Lower marginal income tax rates, fewer regulatory hurdles for entrepreneurs who seek to establish new businesses, a competition policy that makes cartels criminal ventures rather than mere fine-payers, an end to the protection of over-manned national champions from the threat of takeover, and farmers from more efficient producers outside the EU.

It is not yet clear that even the threat of economic stagnation and international irrelevance can muster sufficient support for such radical measures in a union in which many states see markets as the enemy, rather than the driver of efficiency and higher living standards. Adam Smith and Milton Friedman haven't achieved iconic status in most EU countries.

Finally, if Europe is to be taken seriously as this century wears on, it will have to get its act together. One president of some consequence — a Tony Blair, perhaps — instead of three sharp-elbowed bureaucrats jostling for primacy. Most important, a stitching together of the Franco-German relationship.

This is not a matter of finding some way that the hyperactive Nikolas Sarkozy and the cautious Angela Merkel can accommodate each other's foibles. They are not forever. Their nations are.

But for now it matters that Ms. Merkel is inflation-shy, reluctant to reward profligacy, and unwilling to cede control over Germany's economic affairs to Brussels. Mr. Sarkozy, meanwhile, would like to institute European economic management, and assert political control of the European Central Bank so as to soften its anti-inflation stance.

Germany is less shy of asserting its national interests as the World War II generation dies out, making it difficult for Mr. Sarkozy to continue the EU arrangement France found so attractive —Germany the horse, France the rider; Germany, with its strong balance sheet, the funder, France the spender. Resolve these differences or policy paralysis and irrelevance surely await.