Niall Ferguson: Will Europe Act to Avoid an Economic Cataclysm?

With the sap rising and the governments falling, all the European powers are merrily acting in national character.

In the midst of a severe financial crisis, the French have just elected a champagne socialist on promises of a 75 percent top tax rate and a lower retirement age. The Greeks also had an election in which the established parties lost to a ragbag of splinter groups. The outcome of the election was that they need to have another election. (Cue Zorba the Greek theme music.) Meanwhile, the wailing gloom of the flamenco emanates from Spain, where youth unemployment is now around 50 percent.

Within a few hours of arriving in London, I hear the following announcement on the train: "We apologize for the late departure of this service. This was due to the late arrival of essential personnel. [Translation: the driver overslept.] However, we are happy to inform customers that the London Underground is running a nearly normal service." It's that "nearly" that is so quintessentially English.

Three days later, in Berlin, I finally reach the Europe that works. Well, sort of. As usual, I find myself marveling at the sheer idleness of the richest and most successful country in the European Union. Lunchtime in the leafy garden of the Café Einstein on the Kurfürstenstrasse shows no sign of ending even at 3 p.m. It's Thursday. Did you know that the average German now works 1,000 hours a year less than the average South Korean? That's why when you go on holiday the Germans are already there—and when you go home, they stay on.

Understandably, many American investors have simply given up on Europe. After two years of the world's most tedious soap opera ("Can Angela get on with François, the new boy in town? Is Mario the real thing after phony old Silvio?"), they have come to the conclusion that it is only a matter of time before the whole euro zone comes crashing down, with Greece in the role of Lehman Brothers.

Meanwhile, in Berlin they still talk of "buying time." They mean by this that as long as the European Central Bank keeps printing money, lending to weak Mediterranean banks so that they can buy the bonds of weak Mediterranean governments, it will all work out in the end. This is a delusion. The economies of the Southern European countries are in a disastrous state, comparable with the conditions of the Great Depression. True, they no longer have the Keynesian option to engage in deficit finance; their debts are already too large. But the German prescription of austerity tax hikes and spending cuts in the teeth of recession is losing political credibility with every passing week.

Suddenly it is no longer so hard to imagine a Greek politician deciding to gamble on exiting the euro zone, restoring the drachma, and letting a drastic devaluation do its work. Suddenly it is no longer so hard to imagine the horrendous consequences, with investors asking the obvious question: "If they can leave, who will be next?"

As last year's Nobel economics laureate Thomas Sargent pointed out in his brilliant acceptance lecture, Europe is now roughly where the United States was between the Articles of Confederation of 1781 and the Constitution we know today, which replaced them in 1789. What is desperately needed is an Alexander Hamilton, prepared to take all or part of the debts of the individual states onto the federal balance sheet. What is desperately needed is a recognition that Europe's present confederal structure is incompatible with monetary union created in 1999.

The solution is available. Since November of last year the European Commission has been actively considering how to create "Stability Bonds" that would put the full faith and credit of the EU (i.e., Germany) behind at least part of the national debts of the member states. Taken individually, some of these debts are hopelessly high. Added together and compared with total euro-zone GDP, they are manageable.

What stands in the way is not French socialism or Greek populism. It is quite simply German complacency. Life in Berlin is good. In Munich, the capital of the German manufacturing machine, it is even better. You should try explaining to the average Bavarian beer drinker at the Stammtisch why he needs to get ready to finance an annual transfer to the Mediterranean countries of up to 8 percent of German GDP. I never get very far.

Here, then, is the twist in my tale of national character. For two generations, the Germans really did want to take over Europe—by force. But today, when they could do so peacefully, they can't be bothered.